The British pound stabilised Tuesday as United Kingdom authorities tried to ease investor concerns after the biggest tax cuts in 50 years sent the currency tumbling to a record low the previous day.
The turmoil is already having real-world effects, with several British mortgage lenders pulling offers from the market amid expectations the Bank of England will sharply boost interest rates to offset the inflationary impact of the pound’s recent slide.
It was trading at around US$1.08 on Tuesday, after plunging as low as US$1.0373 early Monday. The British currency is still down four per cent since Friday, when Treasury chief Kwasi Kwarteng announced plans for ?45 billion (US$49 billion) of unfunded tax cuts. The pound has fallen 20 per cent against the dollar this year.
Kwarteng’s announcement, which comes at the same time the government plans to borrow billions to help shield homes and businesses from soaring energy prices, sparked concerns that the new government’s policies would swell government debt and further fuel inflation.
Late Monday, the central bank said it was “closely monitoring” financial markets and was prepared to boost interest rates “as much as needed” to curb inflation, which is already running at 9.9 per cent, the highest among major economies. The bank’s Monetary Policy Committee isn’t scheduled to meet until November 3.
“There is no rate increase today and speculators will enjoy the prospect of two months of Bank of England inactivity if the statement is taken at face value,” said Alastair George, chief investment strategist at Edison Group.
The UK Treasury also sought to reassure investors, saying it would set out a more detailed fiscal plan and independent analysis from the Office for Budget Responsibility on November 23.
“We have responded in the immediate term with an expansionary fiscal stance on energy because we had to. With two exogenous shocks – COVID-19 and Ukraine – we had to intervene. Our 70-year-high tax burden was also unsustainable,? Kwarteng said in talks with investors on Tuesday following the so-called “mini-budget? last week.
“I’m confident that with our growth plan and the upcoming medium term fiscal plan – with close cooperation with the Bank – our approach will work,” he said.
That did little to quiet criticism of the government’s policies.
Lawrence Summers, who served as US Treasury secretary under Bill Clinton, said he was surprised that the International Monetary Fund hadn’t spoken out because a currency crisis in Britain could have worldwide consequences and affect London’s viability as a global financial centre.
“I was very pessimistic about the consequences of utterly irresponsible UK policy on Friday,” Summers tweeted Tuesday. “But, I did not expect markets to get so bad so fast.”
Kwarteng and Prime Minister Liz Truss, who replaced Boris Johnson as prime minister on September 6, are betting that lower taxes and reduced bureaucracy eventually will generate enough additional revenue to pay for the tax cuts announced Friday.
But many economists say it is unlikely the gamble will pay off.
Torsten Bell, who heads the Resolution Foundation, a think tank focused on economic inequality, said the markets were looking at the government’s plans “and saying that is not what serious policymaking looks like”.
Market reaction to Friday’s announcement will hurt consumers by fuelling inflation in the short term, leading to higher mortgage payments in the medium term, and boosting government borrowing in the long term, the foundation said Monday.
“The world we are heading for is a bumpy few weeks,” Bell told Sky News. Kwarteng “is now going to have quite a tough time because he has now set out plans to balance the books in November. That is going to be very hard.”