The pound sterling crashed to an all-time low against the US dollar on Monday, falling nearly 5% to $1.0327, its weakest level since decimalisation in 1971. The dramatic sell-off followed Chancellor Kwasi Kwarteng's mini-budget last Friday, which unveiled £45bn in debt-financed tax cuts and spending measures, shaking investor confidence in the UK's economic management.
Analysts warned that the currency rout could force the Bank of England into an emergency interest rate hike. Paul Dales, chief UK economist at Capital Economics, suggested the Bank might need to raise rates by 100 to 150 basis points immediately, potentially to as high as 3.75%. The UK bond market also suffered, with the cost of government borrowing posting its biggest single-day jump in decades.
Shadow Chancellor Rachel Reeves expressed deep concern over the market reaction, telling Times Radio she was 'incredibly worried'. International economists weighed in, with Nouriel Roubini, who predicted the 2008 financial crisis, warning that the UK was being 'priced like an emerging market' and might eventually need an IMF bailout. However, Nobel laureate Paul Krugman argued that the pound's depreciation improved Britain's net international investment position.
Kwarteng downplayed the market turmoil, telling the BBC he was focused on long-term growth rather than short-term currency movements. 'As chancellor of the exchequer, I don't comment on market movements,' he said, adding that his priority was making Britain an attractive place to invest. The odds of the pound reaching parity with the dollar rose to 26% over the next six months, according to Bloomberg's options pricing model.
