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 Against the U.S. dollar after the British pound touched an all-time low Monday The Bank of England sought to reassure financial markets, but it’s entreaty fell flat for investors concerned about jolting a faltering economy that the government’s plan was meant to prop up and a sweeping package of tax cuts further.

To boost interest rates to curb inflation the central bank said it was “closely monitoring’’ the markets and would not hesitate. As low as $1.0373 its statement came after the pound plunged, in 1971 the lowest since the decimalization of the currency, as the United Kingdom teeters toward recession by Treasury chief Kwasi Kwarteng would swell government debt and fuel further inflation on concerns that tax cuts announced Friday.

“On Thursday in the medium term the bank will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably, which raised rates, and said it would fully assess the government’s tax and spending commitments, before it meets in November”. 

Also Monday, alongside an economic forecast by the independent Office for Budget Responsibility, it would set out a medium-term fiscal plan on Nov. 23 the U.K. Treasury said. 

With the pound dropping from $1.0857 to $1.0664 after they were issued, the statements did little to ease misgivings about the government’s economic policies. Earlier in the day on expectations that the central bank might take action to stabilize the currency the pound had rallied from the record low.

In the new Conservative government the weakening pound piles pressure, which has gambled that it can slash taxes to spur economic growth while at the same time borrowing billions of pounds to help consumers and businesses struggling with soaring energy costs. Many economists say it’s more likely to fuel already high inflation, push down the pound and drive up the cost of the U.K. government borrowing a potential perfect storm of economic headwinds.

Kwarteng has been criticized for failing to release any independent analysis of the plans when he announced the U.K.’s biggest tax cuts in 50 years.

To cap energy prices that are driving a cost-of-living crisis the government plans to cut 45 billion pounds ($49 billion) in taxes at the same time as it spends more than 60 billion pounds.

Kwarteng and Prime Minister Liz Truss to cover government spending, who replaced Boris Johnson as prime minister on Sept. 6, are betting that lower taxes and reduced bureaucracy eventually will generate enough additional tax revenue. Economists suggest it is unlikely the gamble will pay off.

During the coronavirus pandemic as a return to free-market values after years of state intervention in the economy some Conservatives have welcomed the tax-cutting moves. For the government to rack up huge debts that taxpayers will eventually have to pay but others worry it is unconservative.

Against the U.S. dollar since Johnson announced Britain’s first COVID-19 lockdown on March 18, 2020 on Friday, Monday’s turbulence followed a 3% fall in the pound, the biggest one-day drop. After the U.K. voted to leave the European Union in June 2016 before rebounding before that, the pound lost more than 10% of its value immediately.

With Sept. 16, 1992 — “Black Wednesday” — when a collapsing pound against the backdrop of high inflation forced the U.K. to crash out of the European Exchange Rate Mechanism the sense of a government losing control led some to compare current events, which was meant to stabilize exchange rates. It took the U.K. years to recover from the economic shock.

The government was acting responsibly Kwarteng insisted and said there were more tax cuts to come.

The government plans to cap electricity and natural gas prices for homes and businesses to help cushion price rises that have been triggered by Russia’s war in Ukraine and have sent inflation to a near 40-year high of 9.9%, as it is cutting taxes.

Kwarteng said Friday that this program will cost 60 billion pounds, and the government will borrow to finance it.

On Sunday he said that it was the right policy because the government needed to help consumers squeezed by the unprecedented pressures caused by the war in Ukraine and the pandemic.

Kwarteng said Britain can afford the cost because among the Group of Seven large industrial economies its debt as a percentage of gross domestic product is the second lowest. For reducing the nation’s debt in the coming months he said the government would announce a “medium-term fiscal plan”.

Sterling is not the only currency showing weakness, against the dollar as the war in Ukraine drives fears about recession and energy security ahead of the winter the euro also hit a fresh 20-year low.

Against the dollar for more than a year the currency has fallen steadily as investors sought the security of U.S. assets amid the global economic shocks, while the pound’s slide has accelerated in recent days.

By the Bank of England not keeping pace with the U.S. Federal Reserve’s efforts to rein in inflation and the pound’s decline against the dollar also has been fuelled. Britain’s central bank raised interest rates by half a percentage point on Thursday, compared with a large three-quarter-point increase by the Fed last week. 

U.K. inflation is the highest among major economies but the bank predicted that Britain could already be in recession but, which it defines as two consecutive quarters of economic contraction.

Source:- Latest News


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