Pound hits record low after tax cut plans

BBC: The pound has fallen to a record low against the dollar as markets react to the UK’s biggest tax cuts in 50 years.

In early Asia trade, sterling fell close to US $ 1.03 before regaining some ground to stand at about US $ 1.07 yesterday morning, UK time.

Chancellor Kwasi Kwarteng has promised more tax cuts on top of a £45 billion package he announced on Friday amid expectations borrowing will surge.

The cost of UK government borrowing also continued to climb yesterday.

If the pound stays at this low level against the dollar, imports of commodities priced in dollars, including oil and gas, will be more costly.  Other imported goods could also become considerably more expensive, further pushing up inflation, which is already at its highest rate for decades. And British tourists visiting America will find that their holiday money does not go as far as before sterling’s slide.

There are also concerns that the government’s plans to cut taxes and borrow billions will stoke high inflation and force the Bank of England to raise interest rates even further. 

This would raise monthly mortgage costs for millions of homeowners. While worries about the UK economy have hit the pound, its value has also been under pressure due to the strength of the dollar. Other currencies have been falling against the dollar and the euro touched a fresh 20-year-low against the US currency amid concerns about the risk of recession.

Last week, the Bank raised interest rates by half a percentage point to 2.25 percent to try to calm inflation, which is at a 40-year high of 9.9 percent. The rate increase was the seventh in a row and took rates to the highest for 14 years. However, some economists have speculated that the Bank may call an emergency meeting as soon as this week to hike interest rates again. The Bank of England declined to comment. Market-watchers now forecast that interest rates could reach 5.5 percent or even higher by next spring.