The pound has fallen to its lowest level in history against the dollar, falling more than 4 percent as markets reacted to the announcement of the UK’s biggest tax cut in 50 years.
Sterling fell to $1.035 in early Asian trade on Monday before regaining some ground to a 20-year low of $1.05 before recovering further to $1.075 just after 10am this morning.
Chancellor Kwasi Kwarteng has been accused of “fanning the flames” by pointing to new “unfunded” tax cuts, Labor said, after sterling hit its lowest level against the dollar since decimalization in 1971.
The chancellor on Sunday said there was “more to come” in tax cuts after his mini-budget included a huge increase in borrowing to pay for the $45 billion wave of tax cuts.
He and Liz Truss have dismissed analysis that suggests the plan – which includes removing the top income tax rate for high earners – will only increase the incomes of the wealthiest households.
The pound bought less than a euro or dollar this morning at an international exchange office. Change Group’s London St Pancras International office sold €100 for £108.84 – the pound was valued at less than 92 cents.
In addition, interest rate expectations are rising “by the minute,” according to reports with charts showing that the market expects interest rates to hit 6 percent within the first half of 2023.
Some have raised the possibility that the Bank of England may need to call an emergency meeting to raise interest rates again. Leading economist Mohamed El-Erian said the Bank of England should raise interest rates “by a full percentage point to try and stabilize the situation”.
Sir John Gieve, former deputy governor of the Bank of England, told the BBC: “This is what you have to do if you want to change bases [interest] Prices.” But he added, “Emergency meetings will be avoided where possible and I’m sure they will try to avoid it.”
One of the Chancellor’s allies tells the story The times The pound’s fall in value was merely “city boys playing fast and loose with the economy…it had to happen. It will be settled.”
Labour’s Rachel Reeves said on Monday she was “extremely concerned” by the pound’s recent plunge. She said Ms. Truss and Mr. Kwarteng “behaved like two gamblers in a casino chasing a losing streak.”
The Labor Party frontbencher said the Chancellor had “fueled” the pound’s decline by talking about more tax cuts. “Rather than doubling his position on Friday, the Chancellor now needs to come up with credible plans,” she told BBC Radio 4 today Program.
Chloe Smith, the Secretary of State for Work and Pensions, told Sky News: “I would not be in a position to comment on market movements… there are many factors at play in market movements.”
In an interview with CNN, Ms Truss dismissed comparisons to Joe Biden’s approach after the US President said he was “fed up with trickle-down economics”. When asked if she was “recklessly increasing the deficit,” Ms. Truss said, “I don’t accept the premise of the question at all.”
Mr. Kwarteng and Ms. Truss could continue their spree in the new year, with possible further cuts in income tax and the easing of immigration and other regulations.
The government is reportedly considering scrapping a fee for parents earning more than £50,000 claiming child benefit, increasing annual allowances for pension pots and giving a tax break to people who stay at home to look after children or loved ones.
The £45bn tax cut package was met with concern from leading economists, some Tory MPs and financial markets, fueling forecasts that sterling could fall to par with the US dollar by the end of the year.
Such a slump could spark a rebellion from Tory backbenchers who might refuse to vote the government’s finance bill or table letters of no confidence. The Telegraph reports citing supporters and critics of the prime minister.
In a sign of Tory unease, former Conservative Chancellor George Osborne called on the government to end “schizophrenic” policies of tax cuts and increased borrowing.
Mr Osborne told Channel 4: “Basically the schizophrenia has to be solved – you can’t have small government taxes and big government spending.”
Tory grandee Ken Clarke likened the Truss-Kwarteng plan to tax cuts for “the richest 5 percent” of Latin American governments. “I’m afraid this is something that is usually tried in Latin American countries without success,” he told BBC Radio 4.
Former Deputy Prime Minister Damian Green told GB News “conservatism is about more than tax cuts” and said things “have to move quickly” with general elections two years from now.
Labor leader Sir Keir Starmer, who promised a Labor government would reintroduce the top income tax rate of 45 percent, criticized the government’s “wrong” economic policies.
Sterling’s weak performance has fueled investors’ concerns over the gloomy market outlook and recession risk as winter approaches and the war in Ukraine rages on.
Prices of imports of dollar-valued commodities such as oil and gas are expected to rise if the pound remains at such low levels against the US currency.
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