The slide may be good news for many American tourists who visit here and suddenly find their money goes much further. The US dollar is in a strong position, after a series of interest rate hikes by the Federal Reserve.
However, it is worrying for many British households, who were already facing high energy bills and inflation of up to 10 per cent. They may soon face higher costs for imported goods and services, including everything from vehicle fuel to food on plates.
Britain managed to put the world on display last week, with an elaborate state funeral for Queen Elizabeth II. But financial and economic concerns are now front and center again. And Prime Minister Liz Truss’s honeymoon – after just three weeks in office – is surely over.
While Truss pledged tax cuts during her election campaign, the size of the cuts still shocked many economic observers.
“In the current economic environment, it’s a huge gamble,” Wrote Thomas Pope, an economist at the Institute of Government.
Kwasi Quarting, the new chancellor, on Friday, announced a package of cuts worth 45 billion pounds ($48 billion) – the biggest change to the British tax system in 50 years.
It is also a major shift away from the policies of Truss’ predecessor, fellow Conservative Boris Johnson, who last year announced tax increases to help cover the costs of the pandemic.
Under Truss, the government lowered the top income tax rate by 45 per cent for those earning more than 150,000 pounds ($160,000) a year, and eliminated caps on bankers’ bonuses – steps that would effectively help wealthier citizens hopefully. to increase them. spending.
In a broader measure, the government will cap energy bills starting in October – at a cost of £60 billion for six months.
The decline in the British pound raised the possibility of the Bank of England stepping in to support the currency. But the central bank refused to pursue an emergency rate hike on Monday.
The Bank of England said it is “watching developments in the financial markets closely in light of the significant re-pricing of financial assets.”
in a permitThe central bank said its monetary policy committee will conduct a “full assessment” of the impact of the government’s measures and the pound’s depreciation at its next meeting, scheduled for November.
“The Monetary Policy Committee will not hesitate to change interest rates as necessary to bring inflation back to the 2% target sustainably over the medium term, in line with its mandate,” she said.
The recession comes as global markets falter and recession fears grow in many geographies. In the United States, the Federal Reserve raise interest rates last week in its constant quest to curb high inflation. This was the fifth rate increase this year and the third in a row by three-quarters of a percentage point. This is the King of Wall Street, and by Friday The Dow Jones Industrial Average closed below 30.0000to its lowest point since 2020.
Federal Reserve Chairman Jerome H. Powell, last week: “We have to put inflation behind us.” “I wish there was a painless way to do it. There isn’t.”
Major US indices fell in early afternoon trading on Monday, with the Dow Jones down about 275 points, or 0.9 percent, and the Standard & Poor’s down 0.9 percent. The technology-heavy Nasdaq fell 0.3 percent.
The pound’s decline comes about two months after the euro reached parity with the dollar for the first time in Almost two decades. The war in Ukraine disrupted the food supply and led to rising energy costs around the world, especially in Europe. This, combined with the Federal Reserve raising interest rates, has made the dollar a relatively safer bet for investors.
Mike Riddell, fixed income portfolio manager at Allianz Global Investors, said the pound’s decline was not “necessarily a symptom of a European recession”. Instead, investors are starting to doubt Britain’s ability to fight inflation.
“The scary thing is that the global economy has yet to feel the impact of all the rallies we have seen around the world in the past few months, because changes in monetary policy take about a year to have an impact on the economy,” he said in an email.
Of course, a weak currency does not necessarily reflect a weak economy. In many cases, it would be beneficial, for example, to make British exports cheaper for US consumers – so a weak sterling would boost overseas sales for export-oriented firms. But that means anything dollar-denominated, like energy costs, will go up for consumers.
The new British government hopes that by cutting taxes and regulations, it will be able to generate growth that helps fund public services and eventually pay off debt.
John Hardy, head of foreign exchange strategy at Saxo Bank, said the pound is falling because government accounts do not reassure investors.
“It’s a numbers game and their numbers don’t match,” he said.
Investors are looking for the direction of inflation and on Britain’s balance sheet.
“They say, ‘I don’t want to hold the UK cards because they don’t play responsibly,'” Hardy said.
Truss, who is only three weeks into her new job, has defended the tax-cutting boom.
at recent days an interviewCNN’s Jake Tapper told Truss that Britain’s opposition parties are framing their plans as “recklessly running on deficits” and that President Biden is “essentially saying your approach isn’t working.”
Last week, Biden chirp: “I’m sick and tired of the choppy economy. It never worked.” He was referring to the supply-side economics that President Ronald Reagan was famous for, which is similar to Truss’ approach.
Truss replied in the interview: “The UK has one of the lowest levels of debt in the G7. But we have one of the highest levels of taxation. Currently, we have the highest level of tax rates we have in 70 years. What I am determined to do as Prime Minister, what the Chancellor is determined to do.” To do, is to make sure that we incentivize companies to invest. We also help ordinary people with their taxes.”
Truss continued: “That’s why I don’t feel it’s right to have higher national insurance and a higher corporate tax, because that will make it more difficult for us to attract the investment we need in the UK. And it will be difficult to generate those new jobs.”
Rachel Lerman in Washington contributed to this report.