Britain is facing the threat of a full-blown sterling crisis today after the currency slumped to an all-time low against the dollar in the wake of Kwasi Kwarteng’s tax-cutting Budget.
The pound was ‘absolutely hammered’ in trading early this morning, dropping to just $1.0327 – under the grim 1985 baseline of $1.0545.
The ground was clawed back by early afternoon, returning to just over $1.08, although that appears to be partly due to expectations that the Bank of England will need to bring in an emergency 0.75 percentage point interest rate hike this week.
Because many key commodities are priced in dollars, a weak pound drives inflation up further. Markets are now pricing in the headline rate reaching 6 per cent by next year, heaping more misery on families.
The cost of government borrowing also rose to the highest rate in a decade – causing another headache for Kwasi Kwarteng as he is using extra debt to fund tax cuts and the energy bills bailout.
However, the Chancellor is refusing to change course, with Downing Street saying there are no plans for him or Liz Truss to make statements reassuring the markets. Only yesterday Mr Kwarteng promised there are more tax cuts in the pipeline.
Mr Kwarteng refused to comment on currency moves as he was doorstepped in Westminster, but allies were blaming ‘City boys playing fast and loose with the economy’. ‘It was bound to happen. It will settle,’ one told the Times overnight.
Former Cabinet minister John Redwood told MailOnline that traders were ‘trying to make money out of bad news’ and both the Bank and government should ‘completely ignore’ the shifts.
‘You should completely ignore it if you’re the government or Bank of England. These are extremely volatile markets with some very large players clearly running very big bear positions, and other players coming in to take them on,’ he said.
‘There are big players trying to make money out of bad news… if the Pound gets too cheap people should go and buy it, simple as that.’
However, Labour accused the government of putting the UK on the ‘highway to hell’.
And there are signs of Tory disquiet, with former chancellor George Osborne warning that it is ‘schizophrenic’ to try and have ‘small-state taxes and big-state spending’.
Treasury committee chairman Mel Stride swiped at Mr Kwarteng for insisting yesterday that there are more tax cuts to come on top of the huge £45billion package announced on Friday.
‘One thing is for sure – it would be wise to take stock of how, through time, the markets weigh up recent economic announcements, rather than immediately signalling more of the same in the near term,’ the Tory MP said.
The weak pound spells huge trouble for UK businesses, which face increasingly higher costs of importing goods from abroad.
The FTSE 100 typically rises when the Pound falls, as many of the companies are valued in Pounds but make revenue in dollars. However, the index dipped 50 points, below the psychologically important 7,000 level this morning.
The FTSE 250, which is more domestically-focused, was down more than 1.5 per cent.
Source: MailOnline