Sterling hits new low against U.S. dollar amid UK fiscal uncertainty-Xinhua

A woman walks past the Bank of England in London, Britain, on April 13, 2022. (Photo by Stephen Chung/Xinhua)

The pound fell more than 3 percent to trade below $1.10, its lowest level since 1985. On Friday, the forex market was dominated by “the full capitulation of the British pound,” said finance brokerage XTB.

LONDON, Sept. 23 (Xinhua) — The British pound fell to a fresh 37-year low against the U.S. dollar on Friday, as investors feared the large-scale tax cuts announced by the United Kingdom (UK) government would entail fiscal uncertainty.

The pound fell more than 3 percent to trade below $1.10, its lowest level since 1985. On Friday, the forex market was dominated by “the full capitulation of the British pound,” said finance brokerage XTB.

The big sell-off came after Chancellor of the Exchequer Kwasi Kwarteng unveiled his ambitious plan to cut taxes and boost economic growth on Friday morning.

The new measures include canceling the planned increase in corporate income tax to 25 percent, keeping it at 19 percent and reversing the 1.25 percentage point hike in social security contributions in April this year.

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Kwarteng also announced a 1 percent reduction in the property tax rate to 19 percent in April 2023, a year ahead of schedule. The additional income tax rate of 45 per cent on income over £150,000 will be abolished.

Banknotes and coins are seen at a family in Manchester, Britain March 18, 2022. (Photo by Jon Super/Xinhua)

The £45bn package is the biggest tax cut since 1972, said Paul Johnson, director of the Institute for Fiscal Studies.

The big tax cuts are likely to boost borrowing. The new guidelines will involve £411 billion in additional lending over five years, according to the London-based think tank Resolution Foundation.

However, the policy was announced “without even the semblance of an effort to sum up public finance numbers,” Johnson noted.

Instead, the plan appears to be to borrow large sums at ever-higher interest rates and put the national debt on an unsustainable path of increase, he added.

As the pound continues to discount, it can be attributed to a great deal of uncertainty about how these tax cuts will be funded, and that is what the market is most concerned about, the XTB said.

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“Market analysts point out that with such economic uncertainty, the government will have great difficulty funding the deficit,” she added.

Photo taken on January 17, 2022 shows a gas bill and some money in London, Britain. (Xinhua/Li Ying)

Azad Zangana, senior European economist at wealth management firm Schroders, said the timing of these tax cuts “could not have been worse”.

With inflation nearing double digits, the Bank of England (BoE) is raising interest rates to dampen demand in the economy and bring inflation back to its 2% target, but the tax cuts are at odds with the central bank’s targets, it said Zangana feast.

The UK Consumer Price Index (CPI) rose 9.9 percent in the 12 months to August. To combat high inflation, the BoE hiked interest rates by 0.5 percentage points to 2.25 percent on Thursday, the highest level since 2008.

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“The additional huge fiscal stimulus is likely to drive inflation more than growth,” Zangana said.

Elevated inflation, the ongoing energy crisis in Europe and the stronger US dollar continue to put pressure on the British pound. The BoE’s slowing pace of rate hikes versus the US Federal Reserve also contributed to the UK currency’s weakness.

Also on Friday, the FTSE 100, the leading benchmark for UK-listed blue chip companies, ended the session down 1.97 percent at 7,018.60.

Photo taken on March 9, 2020 shows the London Stock Exchange sign in London, Britain. (Photo by Tim Ireland/Xinhua)

In the UK gilt market, two-year yields rose more than 40 basis points to their highest level since the global financial crisis began in September 2008, said Paul Dales, UK chief economist at Capital Economics.

In other words, markets have decided that recent tax cuts “will lead to higher interest rates and that worsening public finances will undermine Britain’s long-term growth prospects,” Dales said.

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