The pound plunged to an all-time low of 1.035 against the US dollar on Monday as traders bet that tax cuts could fuel inflation, prompt faster interest rate hikes, and undermine Britain's already-shaky economy.
Britain's top income-tax rate will be scrapped, the national insurance rate will be nixed, and the stamp duty on property purchases of less than $250,000 will be abolished, according to the Chancellor. There could be more tax cuts.
The tax cut plan is intended to boost the economy and reduce the risk of a recession. Government debt that's out of control and a worse downturn are some of the fears sparked by it.
The UK government's debt pile will grow because some investors don't think the tax cuts will be fully funded. Critics worry the cuts will fuel inflation, which hit a 40-year peak in July, by increasing demand.
The Bank of England hiked its base rate to 2% from zero at the start of the 21st century in order to slow price increases by encouraging saving and raising borrowing costs. The central bank could be forced to raise rates even more aggressively if Kwarteng's tax plan goes through.
The dollar's appreciation and the pound's slump this year is partly due to the US Federal Reserve's series of aggressive interest rate hikes. Some investors have swapped pounds for dollars in order to get a better return.
Russia's invasion of Ukraine has disrupted global energy supplies and caused food and fuel prices to go up. Brits are set for a long cost-of-living crisis because prices have gone up across the board and energy bills are going to go up.
The UK economy contracted last quarter. The weaker pound will make imports more expensive and the government debt load will be more expensive.
The pound is making investors flee.
The CIO of a private credit investment firm says that the market is stable despite a possible housing correction.
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