The British pound fell to a record low against the dollar on Monday after Britain’s finance minister promised more tax cuts that rattled investors.
Sterling fell as much as 4.7% to $1.0350 in Asian trading hours, its lowest level since the UK switched to a decimal currency system in 1971. It was down 1.56% at $1.0681 at last check.
Analysts said the Bank of England may have to introduce an emergency rate hike to prop up the slumping pound. This despite the fact that the Bank of England just raised interest rates by 50 basis points on Thursday and is not due to meet again until November 3rd.
The British currency has fallen since new British Prime Minister Liz Truss unveiled the government’s “growth plan” on Friday. Economists have slammed the proposed tax cuts as fiscally irresponsible as the UK faces a cost-of-living crisis caused by inflation.
“The pound has partially recovered from the decline but is still 3% weaker compared to Friday and the weakness over the past week is a whopping 8%,” said SEB chief quantitative strategist Karl Steiner.
“There is already speculation that the BOE will now have to raise up to 1 percentage point to stabilize the pound,” SEB chief quantitative strategist Karl Steiner said.
Kwasi Kwarteng, appointed chancellor in the new government this month, doubled down on plans to cut taxes in an interview with the BBC on Sunday, saying “more to come”.
The planned tax cuts are the most aggressive in nearly 50 years, scrapping the top rate of income tax and cutting basic rates by 1%.
“The plan was seen as a tax cut for the wealthy along with higher debt levels,” City Index market analyst Matt Simpson said in a note.
“The question now is whether we see a continuation of the European and American session and a rush towards parity – a level that seemed impossible just a few months ago,” he added.
“But if we see another day of trading like today, [the pound] will trade firmly below it.”
Analysts said the fall in the pound could prompt the BoE to take action, even though it raised interest rates by 50 basis points on Thursday and is not due to meet again until November 3.
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