Tax-cut plan pulls British pound to 40-year low against US dollar

British currency trades against the dollar at levels last seen in the early 1980s as the UK struggles to fight inflation.

Woman holds British pound banknotes
The pound dipped as low as $1.0349, the lowest ever, early on Monday [File: Dado Ruvic/Reuters]

The British pound has resumed a slide against the US dollar after Britain’s new government outlined plans to cut taxes and boost spending.

On Monday morning, the pound fell by as much as five percent against the dollar at one point touching $1.0327, its weakest at least since the introduction of decimalisation in the early 1970s.

The government’s tax-cut plan has sparked concerns that increased public borrowing will worsen the nation’s cost-of-living crisis.

This is the pound’s biggest drop against the US dollar since March 18, 2020, when then-Prime Minister Boris Johnson announced the first nationwide lockdown to control the spread of COVID-19.

It closed at $1.0822 in London on Friday, from $1.1255 on Thursday.

Inflation 40-year high

Prime Minister Liz Truss, who took office less than three weeks ago, is racing to combat inflation, which is at a nearly 40-year high of 9.9 percent, and head off a prolonged recession. Facing a general election in two years, she needs to deliver results quickly.

Treasury chief Kwasi Kwarteng recently announced sweeping tax cuts he said would boost economic growth and generate increased revenue without introducing corresponding spending reductions.

He also said previously announced plans to cap soaring energy bills for homes and businesses would be financed through borrowing.

Market Analyst Han Tan said a partial reason for the slide is the Bank of England’s reluctance to raise interest rates as high as its more aggressive central banking peers.

“When you shift your attention to the government side, these tax cuts really highlight the growing twin deficit for the UK economy,” he told Al Jazeera from Abu Dhabi.

“So I think overall, there is little to show confidence, not only to the pound but also to UK assets, hence the stunning decline that we are seeing in the last couple of trading sessions.”

The financial policy spokeswoman for Britain’s opposition Labour Party said she was incredibly worried about the fall in the pound overnight, saying it put pressure on the Bank of England to raise interest rates.

“I started my career as an economist at the Bank of England and like everyone else I’m incredibly worried about what we’ve seen, both on Friday with market reactions to the chancellor’s so-called mini-budget, and also the reactions overnight,” Rachel Reeves told Times Radio.

“It also puts more pressure on the Bank of England to increase interest rates,” she added.

Source: Al Jazeera and news agencies