British pound reaches a 40-year low as tax cuts continue to shake the economy

In recent times, it appears that every attempt by any government to curb the growing cost of living crisis ends up adding more coals to the already burning fire. 

Last week, the United Kingdom announced a mini-budget that includes extreme tax cuts that the country has not witnessed in the past 50 years. The Liz Truss government thought it was the best idea for the dwindling economy, but little did they know that the decision would send the British pound to its lowest point in the currency’s history. 

In the early hours of Monday, the British Pound dropped below $1.04, the lowest since the introduction of decimalisation in the early 1970s. Experts say it is not unconnected with the mini-budget announced by Finance Minister Kwasi Kwarteng on  Friday.

Mike Riddel, senior portfolio manager of Allianz Global Investors, said it was time for the Bank of England to react if it wanted to avert a currency crisis. 

“The Bank of England is in a very difficult spot where if they don’t react they risk another sterling collapse and things getting very messy,” Mike Riddell said.

The financial policy spokesperson of the opposition Labour party, Rachel Reeves, also said that the fall of the sterling is putting pressure on the Bank of England to raise interest rates. 

“I started my career as an economist at the Bank of England and like everyone else, I’m incredibly worried about what we’ve seen, both on Friday with market reactions to the chancellor’s so-called mini-budget, and also the reactions overnight,” Rachel Reeves told Times Radio.

“It also puts more pressure on the Bank of England to increase interest rates,” she added.

Jim O’Neill, a former U.K. Treasury minister, said the strength of the dollar was not the cause of the fall in the British pound.

“It is a consequence of an extremely risky budget by the new chancellor and a rather timid Bank of England that, so far, has only raised rates reluctantly despite all the clear pressures,” he told CNBC Monday.

No confidence in Truss

Barely three weeks into the leadership of Liz Truss, there are already indications that members of the conservative party are scared that she could crash the economy. On Monday, sky news reported that some MPs are already submitting letters of a no-confidence vote on the new prime minister as they did with former Prime Minister Boris Johnson. 

The unidentified MP told Sky News that Truss and Kwasi are “playing A-level economics with people’s lives.”

“They are already putting letters in as they think she will crash the economy. The tax cuts don’t matter as all noise anyway – mainly reversing back to the status quo this year. The issue is government fiscal policy is opposite to Bank of England monetary policy – so they are fighting each other. What Kwasi gives, the Bank takes away,” the MP said. 

Liberal Democrats spokesperson Sarah Olney said if the pound continues to fall, it would be time for Kwasi Kwarteng “to resign to restore confidence in our economy.”

She said: “By proposing a botched and out-of-touch budget, then refusing to comment when it goes wrong, the chancellor is showing contempt for British families and businesses.”

“If the pound continues to plummet and reaches parity with the dollar, this would be an unprecedented national humiliation with devastating consequences,” she added.