Global Recession Arrives As UK Pound Sterling Drops To 37-Year Low

In response to worries about out-of-control inflation and a recession, the British pound sterling has dropped to its lowest level in decades versus the US dollar. In order to spur growth, the government has launched a significant tax cut plan.

The pound sterling fell almost 2% to as low as $1.1042 on Friday as the UK government unveiled huge tax cuts and significant increases in borrowing. This was the currency’s lowest level since early 1985.

Some traders have been cautiously eyeing the government’s intentions because the pound sterling is already suffering from the effects of excessive inflation, the aftermath of the COVID outbreak, and Brexit.

Why has the pound sterling performed poorly?
With rising inflation brought on by Russia’s war in Ukraine posing a threat to businesses all over the world, traders seem to be getting more and more worried about the UK’s economic outlook.

The government of newly-installed UK Prime Minister Liz Truss faces an immediate challenge as a result of rising inflation and a cost-of-living issue that has affected the pound sterling.

The rate of inflation is currently close to 9.9%, the highest since the 1980s, and is expected to increase to 11% next month.

On Friday morning, the pound sterling fell against the euro, which was also performing poorly on currency markets. It went from €1.14 to €1.13.

A day after the Bank of England raised interest rates by 50 basis points, sterling fell versus both currencies. While normally such an increase would raise the value of the currency.

The UK may have already entered recession, which is defined as two consecutive quarters of contraction, the bank said as it boosted rates. As the cost of borrowing increases, there are worries that increased interest rates may hinder investment. You can read more of such stories at Credible News.

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Investors are suspicious about Truss’s government’s willingness to use borrowing to finance economic development and tax reductions.

How is the British government acting?

Kwasi Kwarteng, the UK’s finance minister, outlined a number of tax cuts targeted at promoting growth and said they would be financed by borrowing and an increase in revenues from higher growth.

In a bid to resuscitate the flagging economy, Kwarteng declared he would lower personal income tax, drop a proposed company tax increase, and lift a restriction on bankers’ bonuses.

Next year, the highest rate will change from 45% to 40%, while the base rate will decrease from 20% to 19%.

Because the Kwarteng declarations were not followed by an evaluation by the independent Office for Budget Responsibility, they were classified as a “fiscal event” as opposed to a real budget.

The ideas were referred to as a “desperate gamble” by the opposition Labour Party.

The finance spokeswoman for Labour, Rachel Reeves, declared that “never has a government borrowed so much and explained so little… this is no way to generate trust, this is no way to build economic growth.”

The largest reduction in taxes since the budget of 1972, according to the Institute for Fiscal Studies, the top economic research organisation in the UK.

You can read more of such stories at Credible News and The Cheer News

AFP, dpa, Reuters, AP