The pound has been sliding meekly down once morest the dollar for years, but the sharp 5% drop seen on Monday has set off alarm bells in a country on the verge of recession.
The British currency registered its biggest drop in a single day in Asian markets since March 2020, when the covid-19 pandemic began.
It reached the historical low of 1.0327 dollars, its lowest level since 1972.
The opening of the European stock markets brought some calm hours later, but the panic among investors seems to make it clear that policies of the new Prime Minister Lizz Truss worries the markets.
Analysts agree that the crash is the reaction to the Biggest UK tax cuts in 50 years presented on Friday by the Secretary of Finance and Treasury, Kwasi Kwarteng.
The pound started to fall on Friday when Treasury and Treasury Secretary Kwasi Kwarteng announced a package of measures.
The measures fueled concerns that, with this cut, the government will have difficult to stabilize public finances and might cause inflation and public debt to skyrocket.
“The timing of these tax cuts might not have been worseas they conflict with the objectives of the central bank, which is trying to contain inflation” located at 9.9%, says Azad Zangana, senior economist at Schroders.
“These cuts are likely to lead to higher inflation and higher interest rates.”
What consequences does it have?
“The immediate costs to consumers might be significant,” says Ben Laidler, global markets strategist at trading platform eToro.
If the pound remains at this low level once morest the dollar, imports of raw materials priced in dollars, including oil and gas, will be more expensive.
This effect can already be seen not only in the United Kingdom, but in any economy that has seen its currency depreciate.
Buy a barrel of oil in international markets is now more expensive given the strength of the dollar.
And hence the prices of gasoline at the pumps have only increased.
Just Friday’s 3.5% drop in the British pound”would add 5 pence to the average cost of £1.65 per liter of petrol (US$1.80), in addition to increasing the price of other imports,” says Laidler.
Imported goods might also become considerably more expensive, further boosting inflation, which is already at its highest level in decades.
The strength of the dollar makes it more expensive to fill the gas tank.
Los technology products, such as iPhoneswhich are made abroad, might also go up in price, the same as things made in the country but with parts that are bought abroad.
Another direct impact on the pocket of households is that the rise in interest rates makes mortgages be more expensive.
There are those who have seen in the fall of the pound a warning to governments trying to put in place similar tax cuts.
“Other countries, from China to Japan, have stepped in in recent days to try to stem the weakening of their currencies,” says Laidler.
“But the UK is in a more difficult situation, with higher inflation, much lower foreign exchange reserves and fiscal policy that is now pulling in the opposite direction,” he adds.
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