As the markets prepared for Kwasi Kwarteng’s “Emergency Budget,” sterling hit a new 37-year low versus the dollar today.
The Pound dropped around 0.6% to $1.117, setting another regrettable record dating back to 1985.
The dollar was maintaining its position versus the euro, with most of the decline attributable to the strength of the US dollar. However, there is growing concern about the government’s plan to use borrowing to fund a freeze on energy prices and significant tax cuts.
The government’s debt interest rates are at an 11-year high as a result of market pressure.
The pound may fall even lower due to measures that “lack credibility” and “raise worries about external financing pressures since the budget and current account deficit combined seems to be going to roughly 15% of GDP,” according to Derek Halpenny, head of research at MUFG.
In a survey conducted by Reuters last week of foreign banks and research consultancies, 55% of respondents said there was a strong danger that trust in British assets would decline significantly over the next three months.
The significant borrowing that would be needed to close the shortfall in the government’s finances has alarmed economists.
The two-year freeze on energy prices announced earlier this month for homes and companies may cost more than £150 billion on its own, and the tax cuts might add a further £50 billion to the bill.
According to the reputable IFS think tank, it would be the greatest tax change since Margaret Thatcher, Ms. Truss’s idol, was prime minister in Nigel Lawson’s 1988 Budget.
The continued decline in the value of the British pound relative to the US dollar—which this morning hit a new 37-year low of just 1.11—has highlighted the risks of adding to the UK’s £2.4 trillion pile of debt as the Ukraine crisis drives up inflation.
The 10-year yield on government gilts has experienced the greatest rise so far in August and September since October and November 1979, highlighting the markets’ apprehension about the situation.
Ms. Truss and Mr. Kwarteng, citing decades of mediocre productivity increases, contend that increasing economic activity may make up the gap.