The pound fell to an all-time low against the dollar this morning, leading to calls from the City for immediate intervention to stop the UK s slide into a currency crisis.
The pound dropped by 4.9 per cent to $1.0327 its lowest level since decimalisation in 1971, as trading opened in Asian markets for the first time since Kwasi Kwarteng, the chancellor, unveiled 45 billion of unfunded tax cuts in an emergency mini-budget on Friday.
As trading volumes increased, it gained ground to $1.0551. The pound fell 2.4 per cent against the euro to €1.0887 in a signal that the fall is not simply an indication of continued dollar strength.
Chris Weston, head of research at Pepperstone, said the pound is getting hammered. There is a response from the Bank of England that investors are looking for a response. They say this is not sustainable. Paul Dales, of Capital Economics, said that Andrew Bailey, the Bank of England governor, must step in today to restore control and credibility. He said that the most effective move would be to implement a large and immediate interest rate hike of at least 100 basis points to 3.25 per cent.
He said we entered the part of the currency crisis where psychology takes over.
The pound has fallen by 22 per cent against the safe-haven dollar this year, and concern is mounting that sterling could reach parity with the reserve currency by the end of the year. The falling pound will cause the price of energy, food and clothing to go up, worsening the cost-of-living crisis.
Dales warned that even if dramatic monetary intervention is not enough to prevent a further slide in the value of sterling, we are not convinced that Bailey has enough credit in the bank to pull this off. He said it would be difficult for the Bank to raise interest rates just days after the government outlined its new economic policies, and that there would be higher interest rates that make the sustainability of the government s fiscal plans even more questionable, as well as from a political economy point of view. She said in an interview with CNN, the US broadcaster, whether she was recklessly running up the deficit, Liz Truss, who has been prime minister for three weeks, said she was incentivising businesses to invest and helping ordinary people with their taxes. After his fiscal statement, the chancellor indicated that his announcements were just the beginning of the government's agenda to revive the UK's stagnant economy.
Kwarteng said that the new administration was looking into possible further reductions in income tax and the loosening of immigration rules and other regulations. He brushed off questions about the markets reaction and said that he remained focused on achieving annual growth of 2.5 per cent.
The 45 billion tax-cutting package was met with alarm and unease by leading economists, some Tory MPs and financial markets. Instead of blaming everyone else, the Chancellor and the Prime Minister, instead of acting like two gamblers in a Casino chasing a losing run, they should be mindful of the reaction not only on the financial markets but also the public, according to the Institute for Fiscal Studies think tank. George Osborne, a Conservative former chancellor, urged the government to end the schizophrenic policy of slashing taxes and increasing borrowing in a sign of Tory unease. He said that you can't have small-state taxes and big-state spending because you can't just borrow your way to a low-tax economy.