The British pound sank to $1.03, before stabilizing slightly, as traders and investors react negatively to new government plans to cut taxes for highest earners and businesses and boosting borrowing.
Kwarteng, who became Chancellor of the Exchequer under new Prime Minister Liz Truss this month, addressed Parliament last week promising a new economic era for the U.K. His proposals constituted the largest tax cuts in half a century, while also boosting borrowing to pay for public spending.
Kwarteng said tax cuts for the country's highest earners as well as for businesses would incentivize investment and stimulate the economy, with taxes generated by a larger economy intended to make up any shortfall created by reduced tax revenue. Britain's Chancellor of the Exchequer Kwasi Kwarteng leaves 11 Downing St. in London, Friday, before announcing plans to Parliament.Britain's Chancellor of the Exchequer Kwasi Kwarteng leaves 11 Downing St. in London, Friday, before announcing plans to Parliament.
In the short term, those higher rates may help strengthen the pound by incentivizing investors to buy U.K. assets because of higher returns. But in the long term, higher interest rates will affect British homeowners significantly through increased mortgage payments. They may also discourage people or businesses from borrowing money, which in turn can dampen long-term economic growth.
It is unusual for a finance minister and central bank to be trying to force the same economy in different directions, and the new Conservative government has faced significant criticism from internationally respected economists, as well as the opposition Labour Party.
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