The British pound plunged below $1.10 in the afternoon, hitting a fresh 37-year low against the greenback.
Finance Minister Kwasi Kwarteng said the government will cut personal income taxes and scrap plans to increase corporate taxes next spring, calling for a “new approach for a new era focused on growth”. At the same time, he pledged to advance plans to subsidize the energy bills of millions of homes and businesses.
But investors aren’t convinced the unconventional approach will actually help the economy, which the Bank of England warned about earlier this week in a recession. Some of them called it a huge gamble.
“It is extremely unusual for a developed market currency to weaken concurrently with sharply rising yields. But that’s exactly what has happened since then [Kwarteng’s] Announcement,” Deutsche Bank strategist George Saravelos said in a note to clients on Friday.
On the way to parity with the dollar?
While tax cuts are politically popular, they could also stimulate demand and push up prices, making the central bank’s job of bringing inflation under control even more difficult.
“I’m very sorry to say this, but I think the UK is behaving a bit like an emerging market turning into a declining market,” Summers said. “Between Brexit, how far the Bank of England has come around the corner, and now this fiscal policy, I think the UK will be remembered for having the worst macroeconomic policies of any major country in a long time.”
The greenback’s breakneck rally as the Federal Reserve takes aggressive steps to curb inflation is increasing downward pressure on the British currency.
“Unless something can be done to address these fiscal concerns, or the economy shows surprisingly strong growth data, it looks like investors will continue to avoid sterling,” said ING’s Antoine Bouvet and Chris Turner in a research note . “We believe the market may be undervaluing the odds of parity.”