The pound fell to a new 37-year low against the dollar as the chancellor released tens of billions of pounds in tax and spending cuts.
The pound fell 0.89% to $1.115 after Kwasi Kwarteng laid out his “growth plan” for the UK economy on Friday morning.
It has since stabilized at around $1.119, but it remains below a previous 37-year low hit earlier this week after concerns about rising interest rates hit the currency.
This comes after the Bank of England launched another 0.5 percentage point hike to 2.25% on Thursday and warned that the UK could already be in recession.
The central bank previously forecast the economy would grow in the current fiscal quarter, but said it now believes gross domestic product (GDP) would fall by 0.1 percent, meaning the economy would contract for two straight quarters – technical definition of a recession. .
The Chancellor, who was appointed on September 6, laid out his first “mini budget” at a time when the UK is facing a cost-of-living crisis, recession, soaring inflation and rising interest rates.
The 45p income tax rate paid by Britain’s highest paid earners will be cut in what will be the biggest surprise in Mr Kwarteng’s plan.
The chancellor also accelerated a planned cut in the base rate by 1p, from 20p to 19p, which will take effect next April.
Mr Kwarteng said removing the 45p rate for people earning over £150,000, which had already been reduced from 50p by George Osborne a decade ago, would “simplify the tax system and make the UK more competitive”.
The Chancellor also confirmed that he is cutting the limit on bankers’ bonuses, while reversing increases in National Insurance contributions would also greatly benefit the wealthy.
Mr. Kwarteng said his economic vision would “turn the vicious circle of stagnation into a virtuous cycle of growth.”
But Shadow Chancellor Rachel Reeves said the strategy was tantamount to “recognizing a 12-year economic failure” under successive Conservative governments.
By calling it a “fiscal event” rather than a full budget, Mr. Kwarteng avoided the Office of Financial Responsibility’s immediate scrutiny and forecasts.
Economists warned that the chancellor’s tax cut ambitions could put additional pressure on the pound, which was also affected by the strength of the US dollar.
Former Bank of England politician Martin Weale warned that the new government’s economic plans would “end badly” with the pound falling in an event similar to that recorded in 1976.
Economists at ING also warned on Friday that the pound could fall to 1.10 against the dollar on the back of difficulties in the securities market.
Chris Turner, head of global markets at ING, said: “Typically looser fiscal and tighter monetary policy is a positive combination for a currency if it can be funded with confidence.
“Here’s the catch – investors have doubts about the ability of the UK to finance this package, hence the poor performance on gold and foreign exchange bonds.
“As the Bank of England seeks to reduce its gold portfolio, the prospect of indigestion in the gold market is real and should keep the pound sterling vulnerable.”
Meanwhile, concerns about higher interest rates and pressure on consumer spending continued to put pressure on the stock market.
The FTSE 100 fell 1.48% to 7,054.64 in early trading, its lowest level since mid-July.
Additional Press Association reporting
Credit: www.independent.co.uk /