The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in half a century. The pound has also been under rising pressure due to the strength of the dollar.

Sterling exchange rates have been significantly losing value since the announcement of the mini-budget and Chancellor of the Exchequer Kwasi Kwarteng’s plans to cut taxes. 

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So why such a drop? One of the explanations can be that investors do not enthusiastically back these plans and feel that the sheer level of government borrowing required will likely cause damage in the upcoming years. 

As Pound Sterling Forecast points out, the pound has lost over 350bps against the dollar sitting in the 1.08 territory, whilst dropping to 1.12 against the Euro and hitting the lowest level against the Swiss Franc since 1974.

If the British currency stays at such a low level against the dollar, the cost of imports priced in dollars, such as oil, gas, and other commodities, will rise significantly. 

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Economists draw attention to the fact that high inflation could force the Bank of England to raise interest rates even further. This would raise monthly mortgage costs for millions of homeowners across the UK. In addition to outlining £45bn in tax cuts, the government confirmed its willingness to spend £60bn for the first six months of its scheme to subsidise rising energy bills for businesses and households. 

Last week, the Bank raised interest rates by half a percentage point to 2.25% in an attempt to tame inflation, which is at a 40-year high of nearly 10%. The rate increase was the seventh in a row and took rates to the highest level in the last 14 years. Market watchers now forecast that interest rates could reach 5.5% by April 2023. 

Image: Unsplash

Author: Sébastien Meuwissen