What has happened?
The pound, which was already at a 37-year low against the dollar, has fallen further. Sterling was trading at more than $1.16 when Liz Truss became Prime Minister just 20 days ago. It fell close to $1.08 on Friday and went as low as $1.0386 during overnight trading in Asia. UK bonds have also slumped – pushing up the cost of government borrowing.
The pound, which was already at a 37-year low against the dollar, has fallen further
Why is sterling down?
The dollar has been surging against all currencies as it combats inflation with aggressive rate hikes. The US economy also looks healthier than those of Britain and Europe. Meanwhile Britain has been racked by political uncertainty and a cost of living crisis. The Bank of England has not acted as forcefully to combat inflation as expected and new Chancellor Kwasi Kwarteng has stunned markets with the biggest tax cuts in 50 years. Coupled with the massive energy bill support package, this has fuelled worries about the scale of government borrowing. Mr Kwarteng doubled down over the weekend, pledging: ‘There’s more to come’. The pound then resumed its sell-off.
What can be done?
The Chancellor has ruled out a U-turn, leaving the Bank of England to watch the markets. Governor Andrew Bailey says the Bank ‘will not hesitate’ to hike rates if needed, but that may not be enough to halt the pound’s rapid slide.
New Chancellor Kwasi Kwarteng (pictured) has stunned markets with the biggest tax cuts in 50 years
Can a weak pound have advantages?
UK exporters will find their products are more competitively-priced against global rivals. However, components for products made in the UK are often made abroad so those exporters will in many cases be absorbing higher costs.
What does it mean for households?
Holidaymakers will find their spending money does not stretch as far and filling up a car could also become more expensive because oil is priced in dollars and will cost more to import. According to the AA, the average tank of petrol has already increased by £7.50. When the pound falls, it can also push up prices in the shops as the cost of buying goods from overseas rises. Meanwhile, the Bank of England is expected to raise its base rate, making borrowing – especially on mortgages – more costly. There is no guarantee that banks will pass on rate rises to savers – and even then it is unlikely to stop the value of savers’ cash being eroded by high inflation. The impact on investments depends on whether companies are sensitive to a weaker pound.