LONDON (AP) — The pound sterling fell to an all-time low against the U.S. dollar early Monday after Treasury chief Kwasi Kwarteng promised a sweeping tax cut package.fueling concerns over the government’s economic policy as the UK teeters towards recession.
The pound fell as low as $1.0373, its lowest level since the currency’s decimalisation in 1971, before rising to around $1.08 in afternoon trading in London.
The weakening currency is putting pressure on the UK’s new Conservative government, which has bet that cutting taxes – and increasing borrowing to compensate – will boost economic growth. Many economists say it is more likely to fuel already high inflation, drive down the pound and drive up the cost of UK government borrowing – a potential perfect storm of economic headwinds.
The Bank of England said it was watching the pound’s decline and would not hesitate to raise interest rates to control inflation after doing so last week. The central bank reiterated its intention to make a “comprehensive assessment” of the government’s fiscal and spending plans at its next meeting scheduled for November.
Despite growing concerns, the government clung on Monday.
“We are not going to comment on day-to-day market movements,” Prime Minister’s spokesman Max Blain said. “This is a medium to long term plan.”
Britain’s currency has been hammered since Friday, when Kwarteng announced the UK’s biggest tax cuts in 50 years.
The government plans to cut taxes by 45 billion pounds ($49 billion) and spend billions to help consumers and businesses struggling with high energy bills. leading to a cost of living crisis. The combination sparked investor concern over spiraling public debt.
Kwarteng and Prime Minister Liz Truss, who took office three weeks ago, are betting that lowering taxes and reducing bureaucracy will eventually generate enough additional tax revenue to cover government spending. Economists suggest the bet is unlikely to pay off.
Opposition Labor Party spokeswoman for the economy, Rachel Reeves, accused the government of “a trickle-down return to economics, an idea that has been tried, tested and failed”.
“They’re not playing with their money, they’re playing with yours,” she told an audience at the party’s annual conference on Monday.
The new and untested Truss, who replaced Boris Johnson as prime minister on September 6, is also facing pressure from a jittery Tory party, which faces an election in two years.
Some conservatives hailed the tax cuts as a return to free market values after years of state intervention in the economy during the coronavirus pandemic. But others fear it is conservative for the government to run up huge debts that taxpayers will eventually have to pay.
Monday’s turmoil follows a 3% fall in the pound on Friday, the biggest one-day drop against the US dollar since Johnson announced Britain’s first COVID-19 lockdown on March 18, 2020. , the pound had lost more than 10% of its value. immediately after the UK voted to leave the European Union in June 2016 before bouncing back.
The feeling of a government losing control has led some to compare current events with September 16, 1992 – ‘Black Wednesday’ – when a plummeting pound sterling amid high inflation forced the UK to withdraw the European exchange rate mechanism, which was intended to stabilize exchange rates. It took years for the UK to recover from the economic shock.
Kwarteng insisted the government was acting responsibly – and said more tax cuts were to come.
“We have only been here 19 days. I want to see, over the next year, people keep more of their income because I believe the Brits are going to lead this economy,” he told the BBC.
As it cuts taxes, government plans to cap electricity and natural gas prices for individuals and businesses to help cushion price increases which were triggered by Russia’s war in Ukraine and propelled inflation to a nearly 40-year high of 9.9%.
The program will cost £60 billion, and the government will borrow to fund it, Kwarteng said on Friday.
He said on Sunday it was the right policy because the government needed to help consumers squeezed by the unprecedented pressures caused by the war in Ukraine and the pandemic.
Britain can afford the cost because its debt as a percentage of gross domestic product is the second lowest among the major industrial economies in the Group of Seven, Kwarteng said. He said the government would announce a “medium-term budget plan” to reduce the country’s debt in the coming months.
The British pound is not the only currency showing weakness. The euro also hit a new 20-year low against the dollar as the war in Ukraine raised fears of a recession and energy security before winter.
As the pound’s slide has accelerated in recent days, the currency has steadily fallen against the dollar for more than a year as investors seek safety in US assets amid global economic shocks.
The pound’s decline against the dollar was also fueled by the Bank of England not keeping pace with the US Federal Reserve’s efforts to contain inflation. Britain’s central bank raised interest rates by half a percentage point on Thursday, against a hefty three-quarters point hike by the Fed Last week. But UK inflation is the highest among major economies, and the bank predicted Britain could already be in recession, which it defines as two consecutive quarters of economic contraction.
The bank’s monetary policy committee responsible for setting rates is not expected to meet again until Nov. 3, but many economists say it may have to raise rates sooner if the pound’s slide continues.
“There was this dramatic loss of confidence in the economic management of the government. But now the ball is in the Bank of England’s court,” said Susannah Streeter, senior investment and market analyst at financial services firm Hargreaves Lansdown.