The pound plunged to a record low against the US dollar early this morning (Monday September 26) after a raft of tax cuts announced by the Chancellor and higher interest rates knocked international confidence in the currency.
It fell by more than 4% to just 1.0327 dollars in early Asian trading, having already tumbled on Friday in the aftermath of Kwasi Kwarteng’s mini-budget. It adds to a months-long fall in the value of the pound.
However, the euro also hit a fresh 20-year low, amid recession and energy security fears. It comes as Mr Kwarteng has been forced to defend his plans in recent days, while suggesting more tax cuts are on the horizon.
Read more: Pound hits all-time low as fallout from Kwasi Kwarteng's 'mini-budget' continues
The Chancellor has previously brushed off questions about the markets’ reaction to his mini-budget – which outlined the biggest programme of tax cuts for 50 years – after it was announced on Friday using more than £70 billion of increased borrowing. On Sunday (September 25), he claimed the cuts 'favour people right across the income scale' amid accusations they mainly help the rich.
Here is a look at why the pound has fallen and what it means for UK households...
Why is the pound falling?
The value of the pound has fallen as international currency traders have been selling off sterling in favour of the traditionally more robust US dollar. Typically traders often buy into the dollar, due to its strength, during times of economic strife, which is why other currencies such as the euro and Japanese yen are also at their lowest against the dollar in decades.
Nevertheless, this week’s particular slump in the value of the pound has also been heavily impacted by political and economic decisions. The Chancellor’s mammoth tax-cutting mini-budget sparked the fall in the pound which has seen it hit the record low.
Rabobank’s Jane Foley said traders have cast some doubt over the spending plans. She said: “They’re worried that some of these tax cuts that have been announced aren’t going to be fully funded. That will result in a large amount of debt at a time when the Bank of England is going to be selling some of its holdings of UK government debt.”
Economists, such as former Bank of England Monetary Policy Committee member Adam Posen, have warned that further Bank of England intervention might now be needed, which has placed further pressure on the pound.
How long will Britons be impacted?
The fall in value will mean higher prices for Britons over the coming months and years. Samuel Tombs, an expert at Pantheon Economics, said inflation is likely to increase by around 0.5 percentage points in 2024 because of recent falls in the pound.
This means that every £1,000 that a family spends will be worth £5 less simply because of the drop in sterling, and will leave the average household around £150 worse off every year. It also adds to runaway inflation, currently at nearly 10% thanks to the massive rise in energy bills facing households and businesses across the UK and Europe.
How will it impact household spending?
Energy bills are one of the things that are likely to increase as the pound falls – the price of all of the gas that the UK uses is based on the dollar – even if the gas is produced in the UK. Similarly, the fact that oil prices are based on the dollar means that petrol could be more expensive for UK drivers as it costs more to be imported by fuel companies.
British firms that import parts or products from across the world will face more costly currency rates, which will particularly impact areas such as food, drink and technology, where price increases could then be passed on to consumers.
For example, Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, suggested the fall of the pound may cause a rise in beer prices for UK customers. He told BBC Radio 4’s Today programme that the drop was “worrying” for the British beer industry, which imports beer and hops from overseas.
What does it mean for travelling abroad?
Foreign holidays are also likely to be more expensive, especially when visiting the US and other countries whose currencies the pound has dropped against. The euro is also weak at the moment, so the cost of holidays in Europe has been less affected in the longer term, although the pound also struck an almost two-year-low against the euro on Monday.
Are there any benefits from a fall in the pound?
It will now be cheaper for tourists to come to the UK, for example, helping to support a sector which was heavily impacted by the pandemic. It is also likely to make British companies more competitive when they export around the world.
A cheaper pound means that it is cheaper for people around the world to buy British goods and services. Weakness in the pound also makes the UK an attractive place for international investment, particularly from the US.
The UK has already seen a number of major acquisitions by US investors, ranging from the takeover of Chelsea Football Club by a consortium led by Todd Boehly to Advent International’s £2.6 billion buyout of Ultra Electronics.
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