Why is the pound sterling in the red and what does it mean for families? As the currency collapse inflicts even more misery on hard-hit households, we answer the top questions
What happened?
The pound, already at a 37-year low against the dollar, has continued to fall. Sterling was trading above $1.16 when Liz Truss became Prime Minister just 20 days ago. It fell to nearly $1.08 on Friday and fell as low as $1.0386 in overnight trading in Asia. UK bonds have also slumped, driving up government bond costs.
The pound, already at a 37-year low against the dollar, has continued to fall
Why is the pound sterling in the red?
The dollar has risen sharply against all currencies as it fights inflation with aggressive rate hikes. The US economy also looks healthier than those of the UK and Europe. Meanwhile, Britain has been plagued by political uncertainty and a cost of living crisis. The Bank of England has not tackled inflation as forcefully as expected and the new Chancellor, Kwasi Kwarteng, has stunned markets with the biggest tax cuts in 50 years. This, coupled with the massive support package for energy bills, has fueled concerns about levels of government borrowing. Mr. Kwarteng doubled over the weekend and promised: “More is to come”. The pound then continued its sell-off.
what can be done
The Chancellor rules out a U-turn and leaves it to the Bank of England to monitor the markets. Governor Andrew Bailey says the bank will “not hesitate” to raise rates if necessary, but that may not be enough to halt the pound’s rapid slide.
New Chancellor Kwasi Kwarteng (pictured) has stunned markets with the biggest tax cuts in 50 years
Can a weak pound have benefits?
UK exporters will find that their products are more competitively priced compared to global competitors. However, components for UK manufactured products are often manufactured overseas, often resulting in higher costs for these exporters.
What does this mean for households?
Vacationers will find their pocket money doesn’t go that far, and fueling a car could also be more expensive because of the dollar price of oil and higher import costs. According to the AA, the average tank of fuel has already increased by £7.50. If the pound falls, it can also push up prices in stores as the cost of buying goods from overseas rises. Meanwhile, the Bank of England is expected to hike interest rates, making borrowing – especially mortgages – more expensive. There is no guarantee that banks will pass rate increases on to savers – and even then, high inflation is unlikely to erode the value of savers’ money. The impact on investment will depend on whether companies respond to a weaker pound.
