Bank of England fails to reassure markets after pound plunge


PTI | London | Updated: 26-09-2022 23:37 IST | Created: 26-09-2022 23:32 IST
Bank of England fails to reassure markets after pound plunge
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The Bank of England sought to reassure financial markets after the British pound touched an all-time low against the US dollar Monday, but its entreaty fell flat for investors concerned about a sweeping package of tax cuts that further jolted a faltering economy that the government's plan was meant to prop up.

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

The bank, which raised rates Thursday, said it would fully assess the government's tax and spending commitments before it meets next in November and “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term.” Also Monday, the UK Treasury said it would set out a medium-term fiscal plan on Nov 23, alongside an economic forecast by the independent Office for Budget Responsibility. The statements did little to ease misgivings about the government's economic policies, with the pound dropping from USD 1.0857 to USD 1.0664 after they were issued. The pound had rallied from the record low earlier in the day on expectations that the central bank might take action to stabilize the currency. The weakening pound piles pressure on the new Conservative government, 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 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 UK's biggest tax cuts in 50 years. The government plans to cut 45 billion pounds (USD 49 billion) in taxes at the same time as it spends more than 60 billion pounds to cap energy prices that are driving a cost-of-living crisis. Kwarteng and Prime Minister Liz Truss, 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 to cover government spending. Economists suggest it is unlikely the gamble will pay off.

Opposition Labour Party economy spokeswoman Rachel Reeves accused the government of “a return to trickle-down economics, an idea that has been tried, has been tested and has failed.” “They are not gambling with their money — they are gambling with yours,” she told an audience at the party's annual conference Monday.

The new and untested Truss also faces pressure from a nervous Conservative Party, which faces an election within two years. Some Conservatives have welcomed the tax-cutting moves as a return to free-market values after years of state intervention in the economy during the coronavirus pandemic. But others worry it is unconservative for the government to rack up huge debts that taxpayers will eventually have to pay.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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