LONDON — The pound hit a record low against the U.S. dollar on Monday, adding to fears of a global recession and reflecting a sharply negative review of Britain’s new government’s plan for big tax cuts financed by heavy borrowing.
The pound sank to $1.03 in early Asian trading on Monday, before recovering some ground to settle around $1.08, still well below where it was earlier on Friday morning that the government unveiled details of its plan to cut taxes to boost growth.
The slide may be good news for the many American tourists who visit here and suddenly find their dollars go much further. The US dollar is in a strong position, following a series of interest rate hikes by the Federal Reserve.
However, it is causing anxiety for many British households, which were already facing rising energy bills and 10% inflation. They may soon face higher costs for imported goods and services, including everything from vehicle fuel to packaged food.
Britain was able to put on a show for the world last week, with an elaborate state funeral for Queen Elizabeth II. But now financial and economic concerns are front and center again. And Prime Minister Liz Truss’ honeymoon, with just three weeks in the job, is over for good.
Who is Liz Truss, the new Prime Minister of the United Kingdom?
Although Truss had promised tax cuts during his leadership campaign, the scale of the cuts still surprised many economic observers.
“In today’s economic environment it’s a huge gamble,” wrote Thomas Pope, an economist at the Institute for Government.
On Friday, Kwasi Kwarteng, the new Chancellor of the Exchequer, or finance minister, announced a package of cuts worth 45 billion pounds ($48 billion), the biggest shake-up of Britain’s tax system in 50 years years.
It is also a major shift from the policies of Truss’s predecessor, fellow Conservative Party member Boris Johnson, who last year announced tax increases to help cover the costs of the pandemic.
Under Truss, the government has cut the top rate of income tax from 45 percent for those earning more than £150,000 ($160,000) a year and scrapped the cap on bank allowances, moves which will mainly help wealthier citizens in hopes of raising their level. expense
In a more far-reaching move, the government will cap energy bills from October, costing £60bn over six months.
The fall in the pound raised the possibility that the Bank of England could step in to shore up the currency. But the central bank refused to pursue an emergency rate hike on Monday.
The Bank of England said it was “monitoring financial market developments very closely in light of the significant revaluation of financial assets”.
In a statement, the central bank said its monetary policy committee would make a “full assessment” of the impact of the government’s actions and the fall in the pound at its next meeting, which is scheduled for November.
“The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target in a sustainable manner over the medium term, in line with its remit,” he said.
The drop comes as global markets falter and fears of a recession grow in many geographies. In the United States, the Federal Reserve raised interest rates last week in its ongoing push to control high inflation. It was the fifth rate hike of the year and the third consecutive increase of three quarters of a percentage point. That hit Wall Street, and on Friday the Dow Jones industrial average had closed below 30,000, to its lowest point since 2020.
“We have to put inflation behind us,” Federal Reserve Chairman Jerome H. Powell said last week. “I wish there was a painless way to do it. There isn’t.”
Major U.S. indexes fell early Monday afternoon, with the Dow down about 275 points, or 0.9 percent, and the S&P 500 down 0.9 percent. The tech-heavy Nasdaq was down 0.3 percent.
The fall in the pound comes about two months after the euro reached parity with the dollar for the first time in nearly two decades. The war in Ukraine has disrupted food supplies and driven up energy costs around the world, especially in Europe. That, combined with the Fed’s rising interest rates, has made the dollar a relatively safer bet for investors.
Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors, said the fall in the pound is “not necessarily a symptom of the European recession”. Rather, investors are beginning to be skeptical about the UK’s ability to fight inflation.
“The scary thing is that the global economy has not yet felt the impact of all the rate hikes we’ve seen around the world in recent months, because it takes about a year for monetary policy changes to have an impact on the “economy,” he said in an email.
A weaker currency, of course, does not necessarily reflect a weak economy. In many cases it may be advantageous, for example, to make British exports cheaper for American consumers; therefore, a weak pound will increase overseas sales for export-oriented companies. But it does mean that anything denominated in dollars, such as energy costs, will go up for consumers.
Britain’s new government hopes that by cutting taxes and regulations, it can generate growth that will help fund public services and eventually pay down the debt.
John Hardy, head of currency strategy at Saxo Bank, said the pound was falling because the government’s maths is not reassuring to investors.
“It’s a numbers game and their numbers don’t add up,” he said.
Investors are looking at where inflation and the UK balance sheet are headed.
“They’re saying, ‘I don’t want to have a UK paper because they’re not playing responsibly,'” Hardy said.
Truss, who is only three weeks into his new job, has defended the tax cut bonanza.
In a recent interview, CNN’s Jake Tapper told Truss that Britain’s opposition parties are framing his plans as “recklessly increasing the deficit” and that President Biden is “essentially saying that your approach out of order”.
Last week, Biden tweeted: “I’m sick and tired of the trickle down economy. It’s never worked.” He was referring to supply-side economics made famous by President Ronald Reagan, which Truss’s approach resembles.
In the interview, Truss replied: “The UK has one of the lowest levels of debt in the G-7. But we have one of the highest levels of tax. We currently have a 70-year high in our tax rates . And what I’m determined to do as Prime Minister, and what the Chancellor is determined to do, is make sure we’re incentivizing businesses to invest. And we’re also helping ordinary people with their taxes.”
Truss continued: “That’s why I don’t think it’s right to have higher national insurance and higher corporation tax, because that will make it harder for us to attract the investment we need to the UK. It will make it harder to generate those new jobs of work.”
Rachel Lerman in Washington contributed to this report.