British pound crashes to record low as govt cuts taxes

The British pound crashed to a record low against the United States’ dollar on Monday amid uncertainties over the finances of the British government.

In early Asia and Australian trading on Monday morning, the pound fell close to $1.03 before regaining some ground to stand at about $1.07.

The record low for the pound against the U.S. dollar was 37 years ago in February 1985 when one pound was worth $1.05, according to a CNN report.

Analysts said that the crash on Monday was triggered by the markets’ reaction to the UK’s biggest tax cuts in 50 years.

The UK government’s borrowing also expected to rise as Chancellor Kwasi Kwarteng promised more tax cuts on top of a £45 billion package he announced on Friday

Effects

With the pound plummeting against the dollar, imports into the UK are expected to be more costly amid concerns that government’s plans to cut taxes and borrow billions will stoke inflation.

Analysts say that the expected uncertainty may force the Bank of England to raise interest rates even further, with ripple effect on monthly mortgage costs for millions of homeowners.

The bank recently raised interest rates by half a percentage point to 2.25%, the seventh increase in a row which took rates to its highest in 14 years.

In addition to the downward slide in the value of the British pound, inflation in the UK is also at a 40-year high of 9.9%.

The BBC reported on Monday that market-watchers now forecast that interest rates could reach 5.5% or even higher by next spring.

Apart from outlining £45bn in tax cuts, the UK government confirmed it would spend £60bn for the first six months of its scheme to subsidise rising energy bills for households and businesses.

Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, told the BBC that the fall in the pound was worrying for the British beer industry, which imports hops from overseas.

“Many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the US, so changes in currency is actually worrying for industry,” he said.

“Then of course people drink a lot of imported beers from Europe, and the euro vs the pound is also something we’re watching very closely at the moment.”