The UK’s chief financial minister Kwasi Kwarteng.
Ian Forsyth/Getty Images
The pound plunged almost 5% to $1.0350 during Asian trading Monday, beneath its previous 1985 low.
The UK government’s tax-cutting has spooked investors, and a minister hinted Sunday more cuts are coming.
Analysts said the Bank of England may need to make an emergency interest rate hike to support the pound.
The British pound tumbled to a record low against the dollar Monday, after the UK’s finance minister promised more of the tax cuts that have rattled investors.
Sterling fell by as much as 4.7% in Asian trading hours to $1.0350, its lowest level since 1971, when the UK switched to a decimal-based currency system. It was down 1.56% at $1.0681 at last check.
Analysts said the Bank of England may have to bring in an emergency interest rate hike to prop up the plummeting pound. That’s even though the UK’s central bank just raised interest rates by 50 basis points on Thursday and isn’t scheduled to meet again until November 3.
The British currency has slid since the UK’s new prime minister, Liz Truss, revealed the government’s “Growth Plan” on Friday. Economists condemned the proposed tax cuts as fiscally irresponsible, given the UK is facing an inflation-fueled cost-of-living crisis.
“The pound recovered some of the decline, but is still 3% weaker compared to Friday, and the weakening over the past week is a whopping 8%,” SEB’s chief quantitative strategist Karl Steiner said.
“There is already speculations that the BOE now will have to hike by as much as 1 percentage point to stabilize the pound,” SEB’s chief quantitative strategist Karl Steiner said.
Kwasi Kwarteng, named chancellor in the new government this month, doubled down on the tax cut plans in a BBC interview Sunday, saying, “There’s more to come”.
The planned tax cuts are the most aggressive in nearly 50 years, as they scrap the top rate of income tax and slash basic rates by 1%.
“The plan has been perceived as a tax cut for the rich alongside higher levels of debt,” City Index market analyst Matt Simpson said in a note.
“The question now is whether we see a follow-through in the European and US session and hurtle towards parity — a level which seemed an impossibility just a few months ago,” he added.
“But if we see another day’s trade like we did today, [the pound] will be trading firmly beneath it.”
Analysts said the crash in the pound could push the BoE to take action, even though it just raised interest rates by 50 basis points on Thursday and isn’t scheduled to meet again until November 3.