Crashing pound falls to US dollar all-time low, squeezing beer and mortgages
The UK government’s economic plans have seen the pound sink to an all-time low against the US dollar, with market confidence taking a hammering in the wake of the chancellor's unveiling of the biggest tax cuts in over 50 years and a hint that more cuts could be on the way.
Sterling has hit its lowest level against the dollar since decimalisation in 1971, falling by more than 4 per cent to just 1.03 dollars in early Asia trading before it regained some ground to about 1.07 dollars earlier today (Monday, 26 September).
The euro also hit a fresh 20-year low against the dollar amid recession and energy-security fears ahead of what is expected to be a painful winter across Europe, with the war in Ukraine showing no sign of ending.
Experts warned that the pound’s plunge towards parity with the dollar will send the cost of goods soaring even higher, potentially worsening the cost-of-living crisis. The pound's fall also means it will be more expensive for the government to borrow money - just when it has decided to borrow billions more.
Shadow chancellor Rachel Reeves accused chancellor Kwasi Kwarteng and prime minister Liz Truss of recklessly gambling with the UK’s finances.
The Labour MP told Times Radio: “Instead of blaming everybody else, instead of behaving like two gamblers in a casino chasing a losing run, they should be mindful of the reaction not just on the financial markets but also of the public.”
Reeves added: “They’re not gambling with their own money; they’re gambling with all our money and it’s reckless and it’s irresponsible, as well as being grossly unfair.”
Kwarteng has previously brushed off questions about the markets’ reaction to his mini-budget – which outlined the biggest programme of tax cuts for 50 years – after it was announced on Friday using more than £70bn of increased borrowing.
He claimed on Sunday that the cuts “favour people right across the income scale,” amid widespread accusations that his cuts predominantly benefit the richest 1 or 2 per cent of the population.
Despite Kwarteng's attempts to defuse the situation, financial markets continue to be spooked and there are fears the Bank of England may be forced to step in with an emergency interest-rate hike in a bid to steady the pound and rein-in inflation fuelled by the tax cuts.
The Bank increased rates by another half percentage point to 2.25 per cent last Thursday, noting then that the UK economy was likely entering a period of recession. However, financial markets are speculating that it may act with another increase before its next scheduled meeting in November, which would impact household mortgage borrowing.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Comments by chancellor Kwasi Kwarteng that he will go even further with historic tax cuts, which are already being criticised as reckless, have added to the anxiety.
“The worry is that not only will borrowing balloon to eye-watering levels, but that the fires of inflation will be fanned further by this tax giveaway, which offers higher earners the bigger tax break.”
The pound’s tumble makes it more expensive to import goods and commodities, such as food, clothes, oil and gas. It is also seeing the cost of UK borrowing surge higher – last week rising by the most in a single day for at least a decade after the mini-budget as it impacted government bonds.
Streeter added: “There is now a tense stand-off between the Bank of England and the Treasury, with policymakers determined to try to bring down inflation by dampening down demand, while politicians are focused intently on trying to boost demand and promote their growth agenda”.
Both Kwarteng and Truss have defended their growth plans package, despite analysis suggesting that the measures, which include abolishing the top rate of income tax for the highest earners, will see only the incomes of the wealthiest households grow while most people will be worse off.
Three days after his fiscal statement, the chancellor indicated his announcements were just the beginning of a government agenda designed to revive the UK’s stagnant economy. His tax-cutting spree could continue in the New Year, with possible further reductions in income tax, as well as the loosening of immigration rules and other regulations.
The government's financial plans are already causing concern for mortgage borrowers, with monthly bills potentially climbing higher amid concerns that pressure is building for the Bank of England base rate to be hiked further in order to steady the pound.
The string of Bank of England base-rate increases which have already taken place in recent months mean that a tracker mortgage is now around £210 per month more expensive on average than it was before the rate increases started in December 2021.
A standard variable rate (SVR) mortgage is now around £132 more expensive per month, according to figures from UK Finance.
While the majority of mortgage holders are on fixed-rate deals, 1.8 million fixed deals are scheduled to end next year, meaning that some homeowners could be in for a bill shock when they come to take out a new mortgage. UK Finance said lenders should be in touch with customers towards the end of their fixed term.
Stamp duty was among the taxes to be cut in last week’s Budget, but rising house prices and mortgage rates are still expected to have a dampening effect on the housing market.
Figures released by Rightmove on Monday showed the average price tag on a home has increased by £2,587 or 0.7 per cent month-on-month in September.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said: “Within the mortgage market, more than three-quarters of people are protected by fixed-rate deals.
“However, for anyone whose deal is expiring or on a variable rate, higher rates will add significantly to their monthly costs.”
Coles added that credit card holders may also need to watch out for the cost of their borrowing becoming more expensive: “Many credit card companies reserve the right to push up rates when the cost of doing business rises, so keep your eye out for notifications.”
Nationwide Building Society reported on Monday that the amount spent by members to pay off debts, such as on credit cards and personal loans, is continuing to increase.
Spending on debt jumped by 18 per cent in August compared with August last year, and increased by 4 per cent month-on-month.
Nationwide said the increase has largely been driven by people using credit cards to deal with the rising cost of living, as well as those paying off previous debt.
Mortgage spending in August was 8 per cent higher than in August 2021, according to Nationwide’s figures.
Spending on rent was up by 17 per cent annually in August, Nationwide said, as the rental sector also deals with the impacts of rising costs.
Meanwhile, the slump in the pound threatens the affordable price of a pint of beer, according to a brewery boss.
Paul Davies, chief executive officer of the Carlsberg Marston’s Brewing Company, said the pound’s slide to a record low was “worrying” for the beer sector.
Products imported into the UK, such as those used by the food and drink sector, would be more expensive and could lead to price increases being passed on to customers.
Davies told BBC Radio 4’s Today programme that the drop was “worrying” for the British beer industry as it imports a significant amount of beer and hops.
Asked if the value of the pound mattered, Davies said: “Yes it does. Many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the States.
“Changes in currency is actually worrying for industry, and then of course people drink a lot of imported beers from Europe and the euro versus the pound is also something we’re watching very closely at the moment.”
The pound was also lower against the euro on Monday morning, having fallen by around 6 per cent against the eurozone currency over the past month.
When asked about potential price increases, Davies said: “Of course things will rise. I would say as an industry we’re generally using British barley and we’re using a lot of British hops, but of course if you’re drinking double IPA that requires a lot of Citra hop and other hops from the States, at some point that is going to have to be passed through to both the customer and the consumer if prices are this volatile.”
Experts at Kantar said grocery inflation increased by 12.4 per cent in August as the food and drink industry had already come under pressure from energy cost increases.
Giles Hurley, chief executive officer of Aldi, said it had products which were influenced by currency shifts but that it is “too early” to say if the pound’s fall will result in higher prices.
“Around 75 per cent of what we sell comes from the British Isles so we are somewhat protected,” he said. “We are insulated through longer-term agreements as well but do have products, such as general merchandise from Asia, which is bought in dollars from Asia.
“Right now, though, we are looking to understand what any impact would be but think it is too early to say what might happen.”
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