The British pound has taken a tumble. What is the impact?

LONDON – The pound hits.

That The British currency has crashed, slipped to an all-time low against the US Dollar. It is a sign of concern in the financial markets about the new Prime Minister, Liz Truss. emergency budgetary measures presented last week to boost the ailing economy.

Investors are being spooked by a sweeping package of tax cuts expected to cost tens of billions of pounds in additional government debt, a risky gamble to stave off a looming recession.

But that’s not all. The currency chaos is playing out against the broader backdrop Dollar rally to a two-decade high.

Here’s a look at what it all means:

EFFECT IN EVERYDAY LIFE

Many Britons fight in the middle rising inflation, driven by rising food and energy pricesin what has been dubbed the worst cost-of-living crisis in a generation.

The pound’s collapse threatens to make things worse. One of the most visible ways is over Feeding into the energy crisis because oil and natural gas are traded in dollars. The impact can be felt at the pump.

According to analysis by the AA, British drivers have paid an average of £5 ($5.45) more to fill up their cars since the beginning of the year as the pound has fallen. UK gas prices would be at least 9p a liter cheaper if the pound were still at mid-February $1.35 levels, compared with the now outdated $1.14 level the group used in its calculation last week Has.

“There’s every chance that a falling pound will make life more expensive,” said Sarah Coles, senior personal finance analyst at financial services firm Hargreaves Lansdown. Everything bought abroad – components, raw materials, supermarket staples and household items – is becoming more expensive.

“These rising costs will lead to higher prices and push inflation even higher,” Coles said. “For anyone whose budget is already stretched to the breaking point, this means even more pain at the register.”

Finance Minister Kwasi Kwarteng hopes big tax cuts will boost economic growth and create wealth, but the falling pound raises the possibility that this will be offset central bank intervenes with unexpectedly high interest rate increases.

Some analysts are speculating that rates could climb as high as 6% by next spring, a sharp contrast to the near-zero levels they reached just a few years ago. Rising interest rates mean many homeowners are facing higher monthly mortgage bills, leaving them less to spend on other goods and services.

HOW LOW CAN IT GO?

15 years ago you could buy 2 dollars for 1 British pound. Now the pound is approaching parity with the greenback, a once unthinkable event and a psychologically important milestone. The pound is down more than 5% since the government outlined its economic plans on Friday, falling as low as $1.0373 early Monday before bouncing back to around $1.08.

Markets are raising the prospect that the two currencies could soon be on an equal footing. Much of the decline was driven by the strength of the dollarwhich has climbed against a variety of other currencies like that The US Federal Reserve is aggressively raising interest rateswhich attracts the interest of investors who are avoiding riskier assets.

The euro, for example, has followed a similar path as the pound fallen below parity against the dollar recently and then hit a fresh 20-year low on Monday.

However, the pound has fallen more than most due to local factors. Investors are concerned by Kwarteng’s “lack of fiscal prudence,” which outweighs any optimism about his pro-growth, anti-bureaucratic agenda, said Victoria Scholar, head of investments at Interactive Investor.

“The international investment community is not only bullish on the dollar, but also very bearish on the pound amid concerns about the UK’s economic outlook and investment case,” Scholar said.

TUG OF WAR

The falling pound underscores what analysts are calling a “tug of war” between the UK Treasury and the central bank, which is independent of government and free to operate from political influence.

The Truss government is betting on tax cuts and more borrowing to boost economic growth when a recession looms.

That puts government officials at odds with the Bank of England, where policymakers are trying to curb inflation that threatens financial stability by raising interest rates, with seven rate hikes so far this year and more in the pipeline.

There is speculation that the central bank may have to step in with a strongly worded statement to calm markets or even an emergency rate hike ahead of its next November meeting, “although that would escalate tensions with the new government,” Jeremy Lawson said , chief economist at the asset manager abrdn.

“There are no good options from here, only less bad ones, as UK households and businesses are already struggling to pick up the pieces,” Lawson said.

IS THERE A TOP?

British exports are getting cheaper for buyers paying in dollars. But the economic impact is likely to be limited given the UK runs a trade deficit with the rest of the world by importing more than it exports.

For foreign visitors, especially Americans, it will be much cheaper. Pub beers, theater tickets for shows in London’s West End and hotel bills are becoming more affordable for tourists.

And for investors and the wealthy, the plummeting pound is making it cheaper to buy property in the UK, particularly in exclusive London neighborhoods long favored by the global super-rich.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission.

https://www.local10.com/business/2022/09/26/the-british-pound-has-taken-a-tumble-whats-the-impact/ The British pound has taken a tumble. What is the impact?

Sarah Y. Kim

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