Why is the pound falling and what does it mean for families? As falling currency increases misery for hard-hit households, we answer key questions
The pound, which was already at its lowest in 37 years against the dollar, fell further. The pound was trading above $1.16 when Liz Truss became prime minister just 20 days ago. It fell nearly $1.08 on Friday and fell to $1.0386 during overnight trading in Asia. UK bonds also slumped, driving up the cost of government borrowing.
The pound, which was already at its lowest in 37 years against the dollar, fell again
Why is the British pound falling?
The dollar soared against all currencies as it battles inflation with aggressive rate hikes. The US economy also looks healthier than those of Britain and Europe. Meanwhile, Britain has been rocked by political uncertainty and a cost of living crisis. The Bank of England has not acted as forcefully as expected to fight inflation and new Chancellor Kwasi Kwarteng has stunned the markets with the biggest tax cuts in 50 years. Coupled with the huge energy bill support package, this has fueled concerns about the scale of government borrowing. Mr Kwarteng doubled down over the weekend, promising: ‘There is more to come’. The pound then resumed its sale.
What can be done?
The Chancellor ruled out a U-turn, leaving the Bank of England to watch the markets. Governor Andrew Bailey said the Bank “will not hesitate” to raise rates if necessary, but that may not be enough to stop the pound’s rapid fall.
New Chancellor Kwasi Kwarteng (pictured) has stunned the markets with the biggest tax cuts in 50 years
Can a weak pound have benefits?
UK exporters will find their products more competitively priced compared to global competitors. However, components of products made in the UK are often made overseas, so these exporters will in many cases have to absorb higher costs.
What does this mean for households?
Vacationers will find that their pocket money does not stretch as far and refueling a car could also become more expensive as the price of oil is in dollars and will cost more to import. According to the AA, the average tank of petrol has already increased by £7.50. When the pound falls, it can also drive up prices in stores as the cost of buying foreign goods rises. Meanwhile, the Bank of England is expected to raise its base rate, making borrowing – especially on mortgages – more expensive. There is no guarantee that banks will pass on rate hikes to savers – and even then, the value of savers’ cash is unlikely to be eroded by high inflation. The impact on investments depends on companies’ sensitivity to a weaker pound.