Sterling fell to a record low against the dollar on Monday after Treasury chief Kwasi Kwarteng promised a big package of tax cuts, stoking concerns about British economic policy as the UK heads to a recession
The pound fell to $1.0373, its lowest level since the currency’s decimalization in 1971, before trading above $1.06 in London afternoon trading.
The weakening currency is increasing pressure on the UK’s new Conservative government, which has bet that lower taxes, and an increase in lending to compensate, will spur economic growth.
Many economists say it is more likely to stoke previously high inflation, cause the pound to fall and raise the cost of government borrowing, a potential perfect storm of economic headwinds.
This Monday, the Bank of England informed that it is monitoring the fall of the pound and that it will not hesitate to increase interest rates to control inflation, after having done the same thing last week.
The central bank reiterated its intention to make a “full assessment” of the government’s fiscal and spending plans at its next meeting scheduled for November.
In an attempt to reassure markets, the Treasury announced that it will set out a medium-term fiscal plan on November 23, along with an economic forecast from the independent Office of Budget Responsibility. But the pound sank two cents after the release of both statements.
The British currency has lost more than 5% of its value against the dollar since Friday, when Kwarteng announced the biggest tax cuts in 50 years.
The government has announced plans to cut 45 billion pounds ($49 billion) in taxes and spend billions of pounds to help businesses and consumers deal with high energy prices, which have fueled a crisis in energy costs. life. The combination sparked investor concerns about mounting sovereign debt.
Kwarteng and Prime Minister Liz Truss, who took office three weeks ago, are betting that low taxes and a reduction in red tape will encourage economic growth and generate enough tax revenue to cover government spending. Economists believe the plan is unlikely to work.
Opposition Labor Party economics spokeswoman Rachel Reeves accused the government of “a return to trickle-down economics, an idea that has been tried before, tried and failed.”
“They’re not betting with their money, they’re betting with yours,” he told an audience at the party’s annual conference on Monday.
Newcomer Truss, who succeeded Boris Johnson as prime minister on Sept. 6, also faces pressure from a nervous Conservative Party, which faces elections in two years.
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