The British Pound crashed below $1.10 in the mid-afternoon, reaching a new 37-year low against the greenback.
Finance Minister Kwasi Kwarteng said the government would cut income taxes and cancel plans to raise corporate taxes next spring, calling for a “new approach for a new era, focused on growth”. At the same time, he pledged to continue plans to subsidize the energy bills of millions of households and businesses.
But investors aren’t convinced the unconventional approach will actually help the economy, which the Bank of England warned this week was likely already in recession. Some of them called it a huge gamble.
“It is extremely unusual for a developed market currency to weaken while interest rates rise sharply. But this is exactly what has happened since. [Kwarteng’s] announcement,” Deutsche Bank strategist George Saravelos said in a note to customers on Friday.Read:Central Bank Of Russia Approves Bitcoin, Ethereum, Others, For Cross-Border Payments
Towards parity with the dollar?
Lowering taxes, while politically popular, could also stimulate demand and drive up prices, making the central bank’s job of controlling inflation even more difficult.
“I’m sorry to say but I think the UK is behaving a bit like an emerging market turning itself into a sinking market,” Summers said. “Between Brexit, how far the Bank of England fell behind and now this fiscal policy, I think Britain will be remembered for having the worst macroeconomic policy of any major country in a long time.”Read:Putin’s Desperate Ukraine Escalation – WSJ
The dollar’s breakneck rally as the Federal Reserve takes aggressive steps to curb inflation is adding downward pressure on the UK currency.
“Unless something can be done to allay these fiscal concerns, or unless the economy shows surprisingly strong growth rates, it appears that investors will continue to avoid sterling,” ING’s Antoine Bouvet and Chris Turner said in a research note. “We think the market is under-priced opportunities for parity.”