Understanding the British pound's sudden crash - CNA

WHAT'S THE GOVERNMENT'S PLAN? 

The aim is that the tax cuts will create a more dynamic economy, which should eventually generate higher tax revenue and keep borrowing in check.

The new Conservative government's plans have drawn comparisons, even among its supporters, with the ill-fated 1972 budget drawn up by Kwarteng’s Tory predecessor Anthony Barber, who also delivered a massive package of unfunded tax cuts. In his case, inflation soared and the economy overheated before collapsing into recession. Barber’s boss, Edward Heath, was defeated by the Labour opposition two years later, and the UK had to seek a bailout from the International Monetary Fund in 1976.

There are also parallels with policies followed in the 1980s by another of Kwarteng’s predecessors, Nigel Lawson, under then Prime Minister Margaret Thatcher. 

WHERE DOES THIS LEAVE THE UK'S PROSPECTS?  

An export powerhouse like Japan is better able to manage a bout of currency weakness thanks to its huge current-account surplus.

The UK is in a similar position to some emerging markets, with one of the largest current-account deficits in the world and an already sizable budget deficit - set to get larger after Kwarteng’s announcement. Inward investment into UK property and other assets tend to prop up the pound in normal years.

But with growth weak and the economy increasingly volatile, there are mounting reasons not to invest in the UK. Lawmakers from Truss’s party have said the Bank of England may need to step in with an emergency rate rise to calm market nerves. 

WHY DOES IT MATTER?

Truss' Conservative Party, which has held power under four prime ministers since 2010, will face a general election by January 2025 at the latest. That gives her little more than two years to convince voters that her policies will work and the country’s cost-of-living crisis will abate.

While she retains a comfortable majority in the House of Commons for now, the party is trailing the opposition Labour Party in opinion polls. A continued decline in the pound would pile further pressure on the government.

Option-market pricing in late September suggested a real chance that the currency will hit parity with the dollar before the end of 2022. 

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2022-09-26 13:51:18Z
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