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 $1.07 on Monday morning, UK time.
Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45bn package he announced on Friday amid expectations borrowing will surge.
The cost of UK government borrowing also continued to climb on Monday.
If 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 imported goods could also become considerably more expensive, further pushing up inflation which is already at its highest rate for decades.
And British tourists visiting America will find that their holiday money does not go as far as before sterling’s slide.
There are also concerns that the government’s plans to cut taxes and borrow billions 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.
While worries about the UK economy have hit the pound, its value has also been under pressure due to the strength of the dollar.
Other currencies have been falling against the dollar, and the euro touched a fresh 20-year-low against the US currency amid concerns about the risk of recession.
Last week, the Bank raised interest rates by half a percentage point to 2.25% to try to calm 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. The Bank of England declined to comment.
Market-watchers now forecast that interest rates could reach 5.5% or even higher by next spring.
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.
For example, 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.
Commenting on the likelihood the Bank of England could raise rates before its scheduled meeting in November, former Bank deputy governor Sir John Gieve told the BBC: “I’m sure they very much don’t want to do that… because that is a sign of pressure.
“Emergency meetings are avoided if at all possible and I am sure they will try to avoid it.”
Sushil Wadhwani, a former member of the Bank of England’s rate-setting committee, said if he was still there: “I would be tempted to announce an extra meeting in a week.
“The argument for waiting a week would be to give them time to properly assess the extra news. The reason for not waiting until November is that they are cognisant of the need to respond in a timely basis to the new developments.”
He added: “Of course, the Bank of England taking action is a second best solution. The first would involve the chancellor coming up with a credible fiscal plan which is blessed by the Office for Budget Responsibility.”
On Monday, the cost of UK government borrowing surged again. Interest rates on borrowing over two and five-year periods reached 4.5%, the highest since the 2008 financial crisis, while rates over 10 years hit the highest since April 2010.
At the weekend, Mr Kwarteng said there was “more to come” in terms of tax cuts after announcing a massive shake-up of taxes on Friday during a “mini-budget” to boost economic growth.
Under the plans, which he hailed a “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.
As well as outlining £45bn in tax cuts, the government confirmed it would spend £60bn for the first six months of its scheme to subsidise rising energy bills for households and businesses. But that cost is expected to rise as the scheme to support households will last for two years.
Shadow chancellor Rachel Reeves described the fall in sterling as “incredibly concerning”.
“We need to hear from the chancellor his plans to get a grip on the public finances because that is what is giving real concern to market traders” and “working people”, she added.
The Treasury refused to publish a forecast by independent watchdog the Office for Budget Responsibility on Friday on the UK’s economic outlook as well as future borrowing and debt.
BBC political editor Chris Mason said that while ministers were not saying anything publicly: “The impression I am left with is they want to ride this out. They hope it is short-term volatility. ”
However, he said one Conservative MP told him: “This is very worrying. All the wheels could come off.”
Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, said the fall in the pound was “worrying” for the British beer industry, which imports hops from overseas.
He said: “Many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the US, so changes in currency is actually worrying for industry.
“Then of course people drink a lot of imported beers from Europe, and the euro vs the pound is also something we’re watching very closely at the moment.”(BBC)
