The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years.
In early Asia trade, sterling fell close to $1.03 before regaining some ground to stand at about $1.06 on Monday, September 26, 2022.
Experts revealed that should the pound stays at this low level against the dollar, imports of commodities priced in dollars, including oil and gas, will be more costly.
Other goods from the US could also be considerably more expensive and British tourists visiting America will find that their holiday money does not go as far as before sterling’s slide.
Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45bn package he announced on Friday amid expectations borrowing will surge. The pound has also been under pressure due to strength of the dollar.
There are also concerns that the tax cuts and a surge in government borrowing will stoke high inflation and force the Bank of England to raise interest rates even further. This would raise monthly mortgage costs for millions of homeowners.
The euro also touched a fresh 20-year-low against the dollar in morning Asia trade amid investor concerns about the risk of recession as winter approaches with no sign of an end to the energy crisis or the war in Ukraine.
Prior to this, the Bank raised interest rates by half a percentage point to 2.25% to assuage the impact of inflation which is at a 40-year high of 9.9%. The rate increase was the seventh in a row and took rates to the highest for 14 years.
However, some economists have speculated that the Bank may call an emergency meeting as soon as this week to hike interest rates again ahead.
Impact of the falling of the pound
On Friday, September 24, 2022, Chancellor Kwasi Kwarteng, announced a massive shake-up of UK taxes during a “mini-budget” to boost economic growth.
Under the plans, which he hailed as “new era” for the economy, income tax and the stamp duty on home purchases will be cut and planned rises in corporation taxes have been scrapped.
Mr Kwarteng stated that a major change of direction was needed to kick-start the UK economy.
Nonetheless, Labour’s former Shadow Chancellor, John McDonnell, insisted that it would not solve the cost-of-living crisis and was a “plan to reward the already wealthy”.
“Internationally people have lost confidence in this government. The mini-budget came as a shock to everyone.”John McDonnell
Investors all around the world trade huge amounts of foreign currency every day. The rate at which investors swap currencies also determines what rate people get at the bank, post office or foreign exchanges.
Many people don’t think about exchange rates until it’s time to swap money for a foreign holiday. When you travel abroad, things will be more expensive if the pound buys less of the local currency.
However, a fall in the pound affects household finances too. If the pound is worth less, the cost of importing goods from overseas goes up. As oil is priced in dollars a weak pound can make filling up your car with petrol more expensive. Gas is also priced in dollars.
Technology goods, like iPhones, that are made abroad, may get more expensive in UK shops. Even things that are made in the UK but from parts that are bought abroad can get much more expensive.