British pound dips to 41 year low against the US Dollar
The mini-budget announced by the UK Chancellor of the Exchequer leaves financial markets in distress and causes the pound to nosedive yet again.
During the early Asia-Pacific trade on Monday, the British pound plummeted to its lowest rate against the US dollar since 1971. After a Friday fall of 3.61%, the sterling extended its losses to more than 4%, reaching $1.0327, before rising back to $1.05.
The Chief Market Strategist at Bannockburn Global Forex, Marc Chandler, commented that an emergency meeting may be held by the Bank of England to deal with the "incredible" plummet of the sterling, as he described it.
Read more: The UK economy is crushed - Analysts
The plunge came after an announcement made last week by UK Chancellor of the Exchequer Kwasi Kwarteng of a new mini-budget, revealing huge tax cuts funded by a significant increase in borrowing.
The announcement led to a sharp slide in UK bonds and currency, after a negative reaction from the financial markets, leaving investors "searching out a response from the Bank of England," as stated by the head of research at Pepperstone, Chris Weston, to the Daily Mail, adding that, "sterling is getting absolutely hammered" and that investors are "saying this is not sustainable when you've got deteriorating growth and a twin deficit.”
The UK Shadow Chancellor Rachel Reeves commented on the budget to the House of Commons last week, saying that British PM Liz Truss and Chancellor Kwarteng "are like two desperate gamblers in a casino chasing a losing run," all whilst describing the budget as a "plan to reward the already wealthy," adding that the argument proposed by the minister "isn’t a great new idea or a gamechanger, as the minister said, as much as they’d like us to think so."
Reeves argued that "What this plan adds up to is to keep corporation tax where it is today, and take national insurance contributions back to where they were in March. Some new plan."
The mini-budget was only supported by a few Conservative MPs, while opposed by others, most notably the former whip of Tory Chief, Julian Smith, who stated it is wrong to impose a "huge tax cut for the very rich at a time of national crisis and real fear and anxiety amongst low-income workers and citizens."
The Telegraph reported last week that Tory MPs will oppose Truss if the pound dips below the US Dollar, and that they will, "hit the nuclear button," against the proposed tax cuts, citing one of the MPs saying, "my biggest anxiety is that I’m going to wake up on Monday and it’s going to be Black Monday.”
The UK Chancellor announced the mini-budget last Friday and claimed that it aims to boost economic growth and resolve the cost of living crisis. Kwarteng promised to increase GDP growth to 2.5% and suggested borrowing more than £411 billion ($446 billion) over five years.
The new measures will include calls for investing £60 billion ($65 billion) over the next six months to lower energy prices for UK homes and businesses. The basic income tax rate will be reduced from 20% to 19% while a previously proposed corporate tax increase of 25% will be overturned and firms will remain to pay a rate of 19% tax. Those earning more than £150,000 ($158,000) per year will see their income tax rate slashed from 45% to 40%. The bonus ceiling for bankers will be removed, while alcohol tariffs will be frozen. Kwarteng also outlined a slew of supply-side measures and a plan to create low-tax investment zones.
It's noteworthy that the UK reported past August that it is witnessing its highest inflation surge of 10% for the first time in 40 years, mounting more pressure on the Bank of England and causing further drops in wages but rapid rises in prices.
The Bank of England warned a couple of months ago that the UK economy will enter its longest recession since the Great Financial Crisis later this year, with economic output declining each quarter from the fourth quarter of 2022 through the fourth quarter of 2023. Soaring natural gas prices are likely to drive consumer price inflation to 13.3% in October, from 9.4% in June, the bank projected.