The pound plunged to a new historic low against the US dollar in response to new chancellor Kwasi Kwarteng launching the biggest round of tax cuts since 1972 in today’s mini-budget.
Sterling crashed over one percent against the greenback to $1.1108, its lowest level in 37 years.
The pound has been on a downward spiral this year, driven by investors fretting over the health of the UK economy and a surge in government spending.
The chancellor today shocked markets by slashing a raft of taxes in a bid to lift UK growth out of the gutter.
Pound/USD exchange rate
The additional rate of income tax of 45 percent has been scrapped, while the 1.25 percentage point national insurance increase and six percentage point corporation tax increase have been reversed. The latter was expected.
Taken altogether, the package will ramp up government borrowing significantly.
Tax cuts reduce the amount the government makes, meaning it has to issue debt to bridge the gap between spending and revenue.
The chancellor’s measures are intended to grow the economy, which would increase tax revenues and reduce the need to borrow.
Yields on short-dated UK debt fired higher on the announcements, nearing four percent. Prices and yields move inversely.
The Bank of England yesterday raised interest rates by 50 basis points, the second such move in a row and the seventh consecutive rate rise, to 2.25 percent.
Kwarteng’s measures are likely to stimulate demand, which may boost inflation, already running at a 40-year high of 9.9 percent.
Domestic energy bills have also been frozen at £2,500 for two years and the government will cover around half the cost of businesses’ gas and electricity bills for six months.
That extra support will keep inflation higher for months, the Bank said yesterday, raising the risk of governor Andrew Bailey and co sending rates even higher and for longer.
London’s FTSE 100 shed 1.3 percent, while the mid-cap FTSE 250 also fell.