The pound fell to its lowest level against the US dollar since 1985, an ominous development in Liz Truss’ first full day as prime minister.
The low point not seen since the days of Margaret Thatcher resulted in part from a strong dollar, as Andrew Bailey, governor of the Bank of England, pointed out this morning.
But the UK’s dismal economic outlook played a role. The bank has warned that rising energy prices will soon trigger a recession that will last until the end of 2023, a year when Britain was already forecast to have the weakest growth of the G7.
“Markets seem to be relishing the opportunity to hit the British pound,” said Valentin Marinov, chief currency researcher at Credit Agricole.
The pound fell as much as 1 percent to $1.1403 on Wednesday afternoon as the greenback continued its strong recent strength, hitting a 24-year high against the Japanese yen and near a maximum of 20 years against the euro.
Financial markets have been rocked by Ms Truss’s economic plans. His promised tax cuts, along with an earmark of more than £100bn to cap energy bills, has seen investors pour into the pound and government bonds in recent weeks.
New Chancellor Kwasi Kwarteng told a meeting with the bank’s bosses that he would pursue an “unashamedly pro-growth agenda”.
Economists doubt the prime minister’s tax cut plan will spur growth. Dr George Dibb, of the Institute for Policy Research, said: “Liz Truss is right to have bold ambitions to grow the economy, but all the signs are that she is falling back on the failed policies of tax cuts and deregulation
“More than a decade of corporate tax cuts have failed on their own promise to boost investment. Any income tax cuts at this point will likely be offset by rising interest rates interest of the Bank of England even more.”
Huw Pill at the Treasury Committee on Wednesday
(Parliament TV)
Huw Pill, the bank’s chief economist, told the Commons Treasury Select Committee on Wednesday that Ms Truss’s plan to freeze energy bills would likely force another interest rate rise despite preventing inflation would reach the maximum forecast of 13.3% for the autumn.
Appearing before MPs with Bailey and two other members of the Bank’s Monetary Policy Committee, Pill said a decision on interest rates would not reflect a fall in inflation in the coming weeks.
“That very short-term implication on inflation may not be the most important from a monetary policy point of view. From a monetary policy point of view, it’s what is the implication of the package of measures … for inflation over longer horizons,” he said.
The four bank officials blamed Russia for Britain’s current economic woes for slowing gas exports to Europe. “I’m afraid we can’t control what Vladimir Putin does,” Bailey said.
Economists have warned that the eurozone is also facing a recession, sending stock markets across the continent reeling. The FTSE 100 fell 0.6%, while France’s CAC 40 and Germany’s DAX were down 0.4%.