British Pound Plunges to Near Dollar Parity Amid UK Turmoil

September 23, 2022

Britain’s new government announced a sweeping series of tax cuts and stimulus policies today, outlining what it hopes will be a path to economic growth despite high inflation. Unfortunately, UK traders and economists are not convinced, with many warning that the plan may further fuel inflation and cause the nation’s debt to balloon.

In the wake of the announcement, UK bonds tumbled and the pound saw its biggest decline since March 2020, falling to the lowest relative to the U.S. dollar in nearly 40 years.

Investors are questioning how the government will fund the largest package of tax cuts the UK has seen since 1972, saying the move is likely to fuel even-higher inflation and force the Bank of England into more aggressive tightening. The reduction in taxes on both worker pay and companies is expected to cost as much as £161 billion over the next five years.

The yield on ten-year gilts (UK government bonds) posted the biggest one-day jump since 1989.

Analysts have noted that the combination of surging yields and a crashing currency is something typically seen in emerging markets, not developed economies like the UK.

In an interview with Bloomberg, former US Treasury Secretary Lawrence Summers remarked “I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”

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