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Pound plummets to fresh 37-year low as mini-budget unveiled

The pound slid to its lowest against the dollar since 1985 on Friday morning (Dominic Lipinski/PA)
The pound slid to its lowest against the dollar since 1985 on Friday morning (Dominic Lipinski/PA)

The pound sank to a fresh 37-year low as the Chancellor unveiled tens of billions of pounds of tax cuts and spending.

Equity markets were also particularly downbeat, with the FTSE 100 plunging to its lowest in three months.

Pound v dollar in last four months
(PA Graphics)

Sterling declined by more than 3% to a low of 1.0862 dollars in the aftermath of Kwasi Kwarteng’s announcement in Parliament.

It represents the lowest figure since 1985 and comes following a period of weakness in the currency after concerns over surging interest rates.

It comes after the Bank of England launched another 0.5 percentage point interest rate hike to 2.25% on Thursday and warned the UK could already be in a recession.

Mini-budget
Chancellor of the Exchequer Kwasi Kwarteng leaves 11 Downing Street to make his way to the Treasury Department to deliver his mini-budget (Aaron Chown/PA)

The central bank previously projected the economy would grow in the current financial quarter but said it now believes Gross Domestic Product (GDP) will fall by 0.1%, meaning the economy would have seen two consecutive quarters of decline – the technical definition of a recession.

Economists had warned that the Chancellor’s tax-cutting ambitions could put further pressure on the pound, which has also been impacted by strength in the US dollar.

Former Bank of England policy maker Martin Weale cautioned that the new Government’s economic plans will “end in tears” – with a run on the pound in an event similar to what was recorded in 1976.

Chris Turner, global head of markets at ING, said: “Typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be confidently funded.

Pound v dollar
(PA Graphics)

“Here is the rub – investors have doubts about the UK’s ability to fund this package, hence the gilt underperformance.

“With the Bank of England committed to reducing its gilt portfolio, the prospect of indigestion in the gilt market is a real one and one which should keep sterling vulnerable.”

The pound also moved significantly lower against the euro, at 1.1223 on Friday.

Meanwhile, concerns over higher interest rates and pressure on consumer spending continued to weigh on the stock market.

The FTSE 100 fell below 7,000 points for the first time in months but climbed back to close at around 7,019 points on Friday afternoon.

Meanwhile, Government gilt yields rocketed amid concerns over the size of the Chancellor’s tax cuts and spending plans.

The 10-year yield jumped around 0.25 percentage points amid a period of heavy selling by nervy traders.