Why the nose-diving British pound matters for Australia
As the British pound hit its lowest value since 1971, experts are warning it could serve as a dire warning for those of us beyond UK shores.
On Monday, it was reported that the pound was worth as little as $US 1.037 ($AU 1.60 or $NZ 1.82), its lowest since the currency was decimalised in 1971.
It comes amid concerns about the state of the global economy, with central banks working to slow the rate of inflation, and economic changes the UK government has introduced.
After Liz Truss became the UK’s new Prime Minister on September 6, Treasury chief Kwasi Krawteng released a controversial mini-budget including hefty tax cuts for the wealthy and an increase in borrowing to spur economic growth.
But, many economists warn it’s more likely to increase inflation even further, with the British central bank expected to increase official interest rates in response.
Since the announcement of the tax cuts on Friday, which come as the biggest cuts in 50 years, the pound lost more than five percent of its value against the US dollar.
Along with the cuts that are set to total £45 billion ($AU 75 billion or $NZ 85 billion), the government also plans to cap prices for electricity and natural gas for homes and businesses to cushion the impact of price rises caused by the Russian invasion of Ukraine.
With the caps to the tune of £60 billion ($AU 100 billion or $NZ 114 billion), Kwarteng said the government would be borrowing the funds needed to finance it.
How does it affect us?
Though that could mean your next UK holiday is cheaper, economist Jason Murphy points to it as a warning for what could be in store for the Australian economy.
Australia’s new Treasurer, Jim Chalmers, is expected to release his first budget in October, which is expected to include his proposed tax cuts that will mostly benefit high-income earners, known as “stage three tax cuts”.
These cuts are a hand-me-down from the Turnbull government’s 2018-19 budget, coming from then-Treasurer Scott Morrison, but they could pose some issues as Aussies face inflation everywhere from the supermarket to keeping the lights on.
Tax cuts encourage spending and that spending encourages businesses to increase prices, resulting in inflation.
With debts from the payouts delivered during the COVID-19 pandemic, Murphy argues that steering clear of tax cuts will also help reduce the country’s debt, which is significantly higher than when Morrison’s budget was first announced.
As we continue to watch what happens in the UK, senior investment and markets analyst Susannah Streeter said it’s difficult to know just how far it will fall.
"It depends, I think, now on what the Bank of England does in response to sterling's most recent fall," she said.
"There's been this dramatic loss of confidence in the government's economic management. But now the ball is in the Bank of England's court."
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