The drop comes as investors react to the new government’s fiscal plan
© Getty Images / Rosemary Calvert
The British pound sterling plunged nearly 5% to an all-time low against the US dollar on Monday. The currency lost as much as 4.85%, dropping to an unprecedented $1.0327 and extending a 3.61% plunge recorded on Friday.
Market analysts say the drop has been brought about by the announcement of a ‘mini-budget’ last week by finance minister Kwasi Kwarteng, which entails historic tax cuts and the biggest increase in borrowing in over 50 years.
“Sterling is in the firing line as traders are turning their backs on all things British. There is a creeping feeling the extra government borrowing that is in the pipeline will severely weigh on the UK economy,” David Madden, a market analyst at Equiti Capital, told The Guardian.
The announcement, which came a day after the Bank of England hiked interest rates to rein in inflation, is viewed as jeopardizing the financial credibility of the government. A weaker pound pushes up the cost of imports, which in turn adds to medium-term inflationary pressures. Many analysts claim that, for the majority of British people, much of the help from tax cuts will be swallowed up by higher energy bills, as well as higher mortgage and borrowing costs.
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Some economists predict that the pound’s plunge could force the Bank of England to raise interest rates to support the currency. They expect a doubling of UK interest rates to more than 5% by next summer.
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