UK Pound Hits 37 Year Low
Bank Of England Building - Frank Augstein/Associated Press
On Sept. 26, the United Kingdom saw its most dramatic currency crisis in recent history. The pound plummeted to its lowest level against the dollar, falling to $1.03 USD – a level not seen in 37 years.
Though the present crisis has been driven by a combination of factors, including Brexit, ex-prime minister Liz Truss’s recent package of tax cuts has been a major contributor in sending the economy into disarray.
Right after Truss was invited to form a government, her administration introduced the UK’s biggest tax cuts in 50 years, estimated at about 45 billion pounds in savings over five years. It proposed tax cuts for the UK’s highest earners, and announced a rollback of corporate tax hikes and a cost increase for national insurance, both intended to go into effect next year. Her plan also slashed the stamp tax, a duty on land sales in England and Northern Ireland, in a bid to increase home purchases.
The UK is already being confronted with inflation, peaking at 11 per cent in October according to the Bank of England, and a slow economic recovery from the still-ongoing pandemic.
To add to all of this, energy prices in the country are set to increase by as much as 80 per cent, Britain’s energy regulator Ofgem in an Aug. 26 announcement, as a result of a sanction on gas supplies from Russia into Europe.
Investors saw the tax cuts as so irrational that they rushed to sell off British assets, thereby driving down the value of Sterling.
The announcement of Truss’s new plan triggered a sell-off in government bonds so severe that the Bank of England had to step in and buy back 65 billion pounds worth of bonds to keep the pension scheme of the country afloat.
“To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome,” stated a Sept. 28 Bank of England news release.