Pound sinks as UK economic uncertainty rises
International Desk: The pound fell against the dollar on Friday as new figures showed a gloomy picture for the UK economy.
Sterling slipped to $1.11, after rallying on Thursday as Prime Minister Liz Truss resigned, reports BBC.
However, it clawed back losses on Friday evening and was back up to around $1.12 against the dollar.
The volatility in the pound came after official figures showed government borrowing rose to its second highest September on record.
Meanwhile, people are shopping less than they did before the coronavirus pandemic, according to figures from the Office For National Statistics (ONS). Retail sales fell by more than expected last month, dropping 1.4% and continuing their slide from August, the official figures showed.
The pound’s latest slide comes after a period of volatile trading for the currency.
It plunged to a record low against the dollar last month, while government borrowing costs rose sharply in the aftermath of the mini-budget. Investors were spooked after the government promised huge tax cuts without saying how it would pay for them.
Government borrowing costs also rose slightly on Friday.
A fall in the US dollar against a number of currencies late Friday helped the pound regain some ground.
But Jane Foley, a currency strategist at Rabobank, said much of the pound’s moves are being driven by investors reacting to political and economic uncertainty in the UK as well as the negative economic data.
“While sterling rallied yesterday on Truss’s resignation, I think investors have realised today that it’s not a guarantee that we’ll get a market-friendly outcome from the Conservative leadership contest,” she said.
The Chancellor, Jeremy Hunt is due to announce plans for spending and tax on 31 October in his economic plan, which the Treasury confirmed was set to go ahead, although there are reports it could be delayed due to the leadership race.
Ms Foley said this uncertainty was also weighing on the pound.
“The longer the uncertainty continues, the worse it’s going to be for the markets.”
Why does a falling pound matter?
A fall in the value of the pound increases the price of goods and services imported into the UK from overseas – because when the pound is weak against the dollar or euro, for example, it costs more for companies in the UK to buy things such as food, raw materials or parts from abroad.
A weaker pound can push rising costs higher as well if companies choose to pass on higher prices to customers. For people planning a trip overseas, changes in the pound affect how far their money will go abroad.
Shoppers buying less
“Consumers are now buying less than before the pandemic,” said Darren Morgan, from the Office for National Statistics (ONS) which released the figures, said.
He added: “Retailers told us that the fall in September was partly because many stores were closed for the Queen’s funeral, but also because of continued price pressures leading consumers to be careful about spending.”
The cost of living crisis continues to squeeze household budgets, with prices rising faster than average wages.
Inflation – the rate at which UK prices rise – surged to 10.1% last month and is expected to climb further.
Mr Morgan, director of economic statistics at the ONS, said all types of shops saw sales drop with food stores particularly hard hit.
The UK is borrowing billions of pounds to limit energy bill rises for households and businesses.
Borrowing – the difference between spending and tax income – was £20bn last month, up £2.2bn from a year earlier, the Office for National Statistics (ONS) said.
It is the second highest September borrowing since monthly records began in 1993, the ONS said.
The figure is lower than in September 2020, at the height of the coronavirus pandemic, when the government was borrowing to fund schemes such as furlough, it said.
Borrowing set to rise
But economists warned that government borrowing is set to rise further in the coming months.
The Office For Budget Responsibility (OBR) makes independent forecasts on what impact government decisions on things like tax and spending will have on borrowing and growth.
It is due to issue its latest forecast on 31 October when the chancellor is due to deliver his economic plan detailing its spending plans.
Carl Emmerson, Deputy Director of think tank the Institute for Fiscal Studies (IFS), said so far for the first half of the year government borrowing was almost as expected but warned it was likely to rise much higher.
“But this is little guide to how much borrowing will be over the whole of this financial year, as the huge cost of government support for household and business energy use only began in earnest this month.”
The IFS predicts borrowing this year could reach almost £200bn, “nearly £100bn more than the OBR forecast,” he added.
Michal Stelmach, senior economist at KPMG UK, also warned that government borrowing was expected to “only worsen from October onwards”.
This was to due the government’s energy price guarantee for households and businesses, on top of the second cost of living instalment and the support for pensioners, he said.
The Chancellor, Jeremy Hunt, said: “To stabilise markets, I’ve been clear that protecting our public finances means difficult decisions lie ahead.
“We will do whatever is necessary to drive down debt in the medium term and to ensure that taxpayers’ money is well spent, putting the public finances on a sustainable path as we grow the economy.”
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