The dropping of the British Pound against major currencies
The British pound plummeted to a record low against major currencies including the dollar as the markets react to the mini budget announced by the government on Friday which revealed the most significant tax cuts in 50 years. Britain Chancellor Kwasi Kwarteng assured to cut more tax along with the £45bn package he announced on Friday amidst the anticipation that borrowing might increase in the coming days.
The cost of government borrowing continued to climb on Monday. The dropping of the British Pound against dollars will cause an abrupt rise in the price of imported commodities including gas and oil. The rates of other commodities are expected to increase, further pushing up inflation which is already at its all-time high rates for decades.
The recent announcements in mini-budget and decisions taken to implement tax reductions and borrow billions might incite inflation and force the Bank of England to increase its interest rates. The Bank of England have raised the interest rates by half a percentage point to 2.25 % to bring inflation under control to certain extend which is at its highest in 40 years at the rate of 9.9%.
Market experts speculate to have the interest rates to reach 5.5% or even higher. Investors who buy and sell foreign currency to generate profit is selling the British Pound because of their uncertainty on government’s plans, says Jane Foley of Rabobank. The interest on government bonds have also risen from 1% in January to more than 4%. The cost of UK government borrowing increased further on Monday, as the interest rates on borrowing over two- and five-year period reached 4.5%, which is the highest since 2008 monetary crisis.
Impact of the falling British Pound
Foreign currency in massive amounts is traded by investors around the world. The rate at which investors exchange currencies influences the amount people get paid at the bank or foreign exchanges. Travelling abroad becomes much more expensive if the British Pound buys less of the local currency. The falling of the British Pound not only affects tourists but also has an impact on household expenses as the cost of importing goods goes up. Along with the rise in the price of oil and gas, the prices of technological goods that are made abroad might become more expensive in UK shops.