While the UK’s tax plans were the initial trigger of the pound’s freefall, economists say that investors’ confidence in the British economy has been waning for some time due to other developments such as Brexit. “The new prime minister’s economic policy of lowering taxes on the wealthy is not too popular, and the consensus is that it will not work in stimulating the economy.” “Confidence in the UK economy is low right now,” Pao-Lin Tien, an assistant professor of economics at George Washington University, told Al Jazeera. On Monday, Raphael Bostic, a top official at the US Fed, warned that the tax overhaul had “really increased uncertainty” and raised the risk of a global recession. The pound’s plummeting value indicates that investors are concerned about the UK’s ability to manage so much extra debt, especially as rising interest rates make borrowing much more costly. When demand for a particular currency is high, the price goes up and vice versa. UK Chancellor of the Exchequer Kwasi Kwarteng has proposed the biggest tax cuts in 50 years Īs with other goods and services, the value of most of the world’s major currencies operates on the principle of supply and demand. The tax cuts, along with a plan to support households in dealing with their rising energy bills, will require the government to borrow an extra 72 billion pounds ($77.7bn) in the next six months alone. Under Chancellor of the Exchequer Kwasi Kwarteng’s “mini-budget” announced on Friday, the UK is proposing the biggest tax cuts in 50 years, including abolishing the 45 percent tax rate on incomes over 150,000 pounds ($162,000). The price of 5-year UK bonds – through which investors loan money to the government – recorded the sharpest fall since at least 1991. On Monday, the pound sank to a record low against the US dollar as investors rushed to sell the currency and government bonds in a demonstration of scepticism over new Prime Minister Liz Truss’s economic plans, which include large tax cuts funded by steep increases in government borrowing.Īt one point in Asian trading, the pound sank as low as $1.0327, surpassing the previous record low reached in 1985, before making back some of its value. As the British pound plummets in value, the United States dollar is flying high.Īgainst a tumultuous backdrop that includes the Ukraine war, soaring prices and China’s COVID lockdowns, sharp fluctuations of some of the world’s major currencies are injecting new uncertainty into the global economic outlook.
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