Pound Tumbles As Tax Cut Plans Spurs Inflation Fears

  • The UK pound hits a fresh 37-year low against the US dollar on Friday.
  • Pound sterling fell below $1.09 as the UK’s new government outlined tax cuts and other moves to bolster economic growth.
  • The British economy is dealing with consumer price inflation hovering around 10%.

The UK pound sharply dropped to an almost four-decade low against the US dollar on Friday on fears the government’s plan to bolster economic growth will fan inflation flames.

The pound fell below $1.10 for the first time in 37 years, tanking as much as 3.2% as the currency pair fell to $1.0899.

The loss was set off after the UK’s new finance minister Kwasi Kwarteng outlined a mini-budget that included the largest tax cuts since 1972, which will slash taxes by £45 billion by 2026. In aiming for a 2.5% growth trend, the plan includes scrapping a 45% income tax rate on earnings of more than £150,000 a year ($164,000) to keep the rate at 40% and reducing stamp duties paid by homebuyers.

The overall plan will require more borrowing by the government that is now led by Prime Minister Liz Truss. The country’s office of debt management foresees an additional £72 billion in bond issuances to £234 billion in the 2022-2023 fiscal year.

“If foreign investors lose confidence in the country, its government and economy, which is happening at scale, Sterling could fall much further and the fallout will be devastating. This will keep inflation higher for longer and growth,” Philip Dragoumis director and owner at Thera Wealth Management in a note Friday.

The Bank of England this week raised its key interest rate by another 50 basis points as it tries to tame hot inflation. The inflation rate of 9.9% is running at a near four-decade high.

“The sell-off in UK assets reflects the sheer panic as the new government’s stimulus package will not only grow an already sizeable debt burden, potentially to unmanageable levels, but will also add to inflationary pressures,” wrote Fiona Cincotta, senior financial markets Analyst at City Index. “The BoE, which has been reluctant to hike rates aggressively, will need to roll up its sleeves and fight inflation with larger rate hikes. Expectations for a 1% hike in November are already climbing.”

UK government bond prices fell, sending yields higher, and the FTSE 100 benchmark equity index lost about 2% on Friday.

Truss became the UK’s new prime minister earlier this month after Boris Johnson stepped down as the leader of the Conservative Party.

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