Written by Kevin Buckland
TOKYO (Reuters) – Sterling fell nearly 5 percent to an all-time low on Monday as investors scrambled to exit after the new government’s fiscal plan threatened to stretch Britain’s finances to the limit.
The coin fell 4.85% to an unprecedented $1.0327, extending its 3.61% decline from Friday, when Finance Minister Kwasi Quarting unleashed historic tax cuts, the largest increase in borrowing since 1972 to pay for them.
Economists and investors said Prime Minister Liz Truss’s government, which has been in power for less than three weeks, is losing fiscal credibility in unveiling such a plan just a day after the Bank of England raised interest rates to contain rising inflation.
The British pound was last down 2.7% to $1.0560.
Mark Chandler, chief market strategist at Bannockburn Global Forex, described the currency’s record decline as “amazing.”
“The weekend press is staining the pound with confirmations of its position in emerging markets,” he said.
“I’m not buying that schadenfreude. However, there is now speculation of an emergency Bank of England meeting and rate hike.”
Quarting’s announcement marked a change in British fiscal policy, bringing back the Thatcher doctrines and Reaganomics of the 1980s, which critics derided as a return to a “downstream” economy.
The so-called mini-budget is designed to pull the economy out of a period of double-digit inflation driven by high energy prices and stagnant real wage growth for 15 years.
In all, the plans will require an additional £72 billion in government borrowing over the next six months alone.
UK government bond yields rose by the most in a single day in more than three decades on Friday, with UK five-year Treasury yields — one of the most sensitive to any near-term shift in interest rate or borrowing expectations — rising by half a percentage point. .
“When we see those gold markets open a little later, we’re likely to see a very sharp rally,” said Chris Weston, head of research at Melbourne-based brokerage Pepperstone.
“In this environment, you either need to see much higher growth – which is not happening at the moment – or you need to see much higher bond yields to stimulate capital inflows. To get bond yields up to those levels, you have to see the Bank of England come out and do emergency lift.