THE pound had its worst day since the early days of the pandemic on Friday after the Chancellor announced his mini-budget.
It fell by more than 3%, yet again dropping to the lowest value against the US dollar for 37 years.
It adds to a months-long fall in the value of the pound. Over the last month, it has dropped by 7% – and the value of sterling is more than a fifth lower than it was a year ago.
Why has the pound dropped?
The pound plummeted after Chancellor Kwasi Kwarteng announced the biggest raft of tax cuts for half a century.
Using more than £70 billion of increased borrowing, Kwarteng set out a package which included abolishing the top rate of income tax for the highest earners.
The pound dived as “spooked” traders swallowed the cost of the spree launched by the Chancellor and Prime Minister Liz Truss two years ahead of a General Election.
Then the price of UK Government borrowing soared even higher as British bond yields rose, amid fears the package had sent the UK markets into meltdown.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the currency fell as markets lost confidence in the UK Government.
"Confidence that these unfunded tax cuts are a coherent policy for today’s inflation-laden times is going up in smoke," she explained.
“The yield on 10-year gilts rocketed to hit 3.7%, surging from 3.2% on Tuesday as investors demanded more return for the greater risk they were taking by buying Government debt.”
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It is unusual that the pound has plunged as interest rates have risen - but Nobel Prize winning economist Paul Krugman explained that this is because the UK is seeing the consequences of "perceived fiscal irresponsibility".
“This is not supposed to happen in advanced countries: we expect deficit spending to drive up interest rates and make the currency rise, which is what happened under Reagan,” he said.
He added: “But Britain is now trading like a developing country, where perceived fiscal irresponsibility is undermining confidence in the value of its currency.”
What does the pound dropping mean for me?
Samuel Tombs, an expert at Pantheon Economics, said that inflation will probably increase by around 0.5 percentage points in 2024 because of recent falls in the pound.
This means that every £1000 that a family spends will be worth £5 less simply because of the drop in sterling, and will leave the average household around £150 worse off every year.
It also adds to runaway inflation, currently at nearly 10%.
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Energy bills are one of the things that are likely to increase as the pound falls – the price of all of the gas that the UK uses is based on the dollar – even if the gas is produced in the UK.
Foreign holidays are also likely to be more expensive, especially when visiting the US and other countries whose currencies the pound has dropped against.
There are some perceived benefits to a lower valued pound. It will now be cheaper for tourists to come to the UK, for example.
It will also likely make British companies more competitive when they export around the world. A cheaper pound means that it is cheaper for people around the world to buy British goods and services.
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