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Pound falls to lowest level against US dollar since 1985

·3-min read

The pound slid to its lowest level against the US dollar since 1985, an ominous development on Liz Truss’s first full day as prime minister.

The low-point not seen since the days of Margaret Thatcher resulted partly from a strong dollar, as Andrew Bailey, governor of the Bank of England, noted this morning.

But Britain’s dim economic outlook played a big role. The bank has warned that skyrocketing energy prices will soon cause a recession lasting til the end of 2023, a year in which Britain was already forecast to have the weakest growth in the G7.

“The markets are seemingly relishing the opportunity to bash the British pound,” said Valentin Marinov, leading currency researcher at Credit Agricole.

The pound fell as much as 1 per cent to $1.1403 on Wednesday afternoon, as the dollar continued its recent strong spell, hitting a 24-year-high against the Japanese yen and nearing a 20-year-high against the euro.

Financial markets have been rattled by the economic plans of Ms Truss. Her promised tax cuts coupled with an expected £100bn-plus set aside to cap energy bills has prompted investors to dump the pound and government bonds in recent weeks.

New chancellor Kwasi Kwarteng said at a meeting with bank bosses that he would pursue an “unashamedly pro-growth agenda”.

Economists doubt the prime minister’s tax-cutting plan will spur growth. Dr George Dibb, of the Institue for Policy Research, said: “Liz Truss is right to have bold ambitions to grow the economy, but all the signs are that she’s falling back on the failed policies of tax cuts and deregulation.

“Over a decade of cuts to corporation tax have failed on their own promise to boost investment. Any cuts to income tax right now will likely be offset by the Bank of England raising interest rates even further.”

Huw Pill at the Treasury Committee on Wednesday (Parliament TV)
Huw Pill at the Treasury Committee on Wednesday (Parliament TV)

Huw Pill, the bank’s chief economist, told the Commons Treasury Select Committee on Wednesday that Ms Truss’s plan to freeze energy bills would likely force another interest rate rise despite stopping inflation from hitting the 13.3 per cent high forecast for the autumn.

Appearing before MPs with Mr Bailey and two other members of the Bank’s Monetary Policy Committee, Mr Pill said a decision on interest rates would not reflect a drop in inflation over the coming weeks.

“That very short term implication on inflation may not be the most important thing for the monetary policy point of view. For the monetary policy point of view it is what is the implication of the package of measures ... for inflation at longer horizons,” he said.

The four bank officials blamed the blamed the UK’s current economic woes on Russia for stemming gas exports into Europe. “I’m afraid we can’t control what Vladimir Putin does, Mr Bailey said.

Economists have warned the Euro Zone also faces a recession, causing stock markets across the continent to tremble. The FTSE 100 slipped 0.6 per cent while France’s CAC 40 and Germany’s DAX each shed 0.4 per cent.