: What is process of UK’s pound hitting record level low after announcing huge tax cuts?
In: 3
The likely scenario (and this isn’t without some speculation) is that the UK cutting taxes (ie reducing govt revenue) and increasing spending (fuel price caps etc) will result in a fairly large budget deficit that the UK government will have to make up by borrowing. At the same time, the Exchequer is raising interest rates to attempt to control inflation. This makes borrowing even more expensive.
Generally, raising interest rates would be expected to strengthen the value of the currency but in this case, if the broader market feels that this introduces a lot of risk in the economy or that the measures taken are likely to lead to recession, fewer investors would be interested in holding on to British assets. This reduces demand for British pounds and therefore weakens the currency.
The problem for the UK is that nearly all major economies (except China) are raising interest rates so their interest rate hikes are neutralized to a degree. Unfortunately inflation appears to be running higher in the UK than other major economies. So the downward pressure seems to be overpowering the upward pressure on the British pound.
Latest Answers