The pound fell to a 37-year low against the dollar as the chancellor unveiled tens of billions of pounds in tax and spending cuts.
Sterling fell 0.89 percent to $1.115 as Kwasi Quarting outlined his “growth plan” for the British economy on Friday morning.
It has since settled at around $1,119, but that is still below the previous 37-year low hit earlier this week after concerns about higher interest rates weighed on the currency.Read:Teenager injured after getting stuck between two vehicles following police chase
It comes after the Bank of England launched another rate increase of 0.5 percentage point to 2.25 per cent on Thursday and warned that the UK could already be in a recession.
The central bank previously expected the economy to grow in the current fiscal quarter, but said it now believes GDP will fall by 0.1 percent, meaning the economy would have experienced two consecutive quarters of downturn — the technical definition of a recession. .
The chancellor, who was appointed on September 6, has put in place his first “mini-budget” at a time when the UK is grappling with a cost-of-living crisis, recession, rising inflation and rising interest rates.
The income tax rate of 45 pence paid by Britain’s highest earners will be scrapped, in the biggest surprise of Quarting’s plan.Read:When storms are most likely to hit Leicester with 38-hour extreme weather warning set to come into force
The chancellor also accelerated a planned cut in the base rate by a penny – from 20 pence to 19 pence – which will now take effect next April.
Mr Kwarteng claimed that abolishing the 45p rate for people earning over £150,000, which had already been cut from 50p by George Osborne a decade ago, “would simplify the tax system and make Britain more competitive”.
The chancellor also emphasized that he had eliminated the cap on bankers’ bonuses, while reversing the increase in National Insurance contributions would benefit the vast majority of the wealthy.
Mr. Kwarteng said his economic vision would “turn the vicious cycle of recession into a virtuous cycle of growth”.
But shadow adviser Rachel Reeves said the strategy amounted to “accepting 12 years of economic failure” under successive Conservative governments.
By calling it a “financial event” rather than a full budget, Mr. Kwarteng avoided spot scrutiny and the expectations of the Office of Budget Responsibility.
Economists have warned that the chancellor’s ambitions to cut taxes could put further pressure on the pound, which has also been affected by the strength of the US dollar.
Martin Will, a former policymaker at the Bank of England, warned that the new government’s economic plans would “end in tears” – with the pound tumbling in an event similar to what was recorded in 1976.
ING economists also warned on Friday that the pound could fall further to 1.10 against the dollar amid the difficulties in the gold market.
Chris Turner, head of global markets at ING, said: “More looser fiscal policy and tighter monetary policy are usually a positive mix for a currency – if it can be funded with confidence.
And herein lies the problem – investors are skeptical about the UK’s ability to fund this package, hence the poor performance of gold.
“With the Bank of England committing to reduce its gold portfolio, the possibility of indigestion in the gold market is a real possibility and should keep sterling weak.”
Meanwhile, concerns about rising interest rates and pressure on consumer spending continued to weigh on the stock market.
The FTSE 100 fell 1.48 percent to 7,054.64 points in early trade – its lowest level since mid-July.
Additional coverage by the Press Association