The British pound hit its lowest level against the dollar since 1985 as Britain faces extreme inflation and other economic hardships.
The pound hit a low of $1.1443 Monday morning in London before a small recovery of 0.1% by midday. Part of the weakening has been due to the relative strength of the dollar, but economic uncertainty due to an ongoing energy crisis and historically high inflation are helping drive the value of the pound down, according to The Wall Street Journal. (RELATED: Dollar Stores Hit By Devalued Dollar)
“The economic challenges facing the U.K. economy are probably of a magnitude as great as anything we’ve seen in living memory,” Mark Dowding, chief investment officer of BlueBay Asset Management, told the WSJ. “There’s a really bleak path in which you end up with the U.K. almost needing to go back to the [International Monetary Fund] for a bailout as a quasi-emerging market crisis.”
British pound nears the pandemic low… what’s going on pic.twitter.com/P8WPepAcwq
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The exact extent of England’s inflation crisis is debated by forecasters, with the Bank of England forecasting 13% inflation, but Citigroup and Goldman Sachs predicting peaks of 18.6% and 22% respectively, according to Bloomberg. The Goldman prediction assumes gas prices remain elevated, but predicts a still high 14.8% inflation rate by January, even if energy prices are brought under control, Bloomberg reported.
The price of the pound could fall to $1.00 within the next year, Dowding told the WSJ. The lowest level it has ever reached was $1.05 in 1985, before the U.S. and the world’s largest economies worked together to weaken the dollar in the Plaza Accord, the WSJ reported.
The pound is also potentially weakened by Britain’s reliance on “the kindness of strangers,” or foreign investors, to plug funding gaps, former Bank of England governor Mark Carney told the WSJ. Foreign investors have typically been willing to buy U.K. debt, property, companies and stocks, the WSJ reported.
The trend of foreign investments seems to be slowing, with foreign investors selling £16.5 billion of government bonds in July, the largest sell-off since July 2018, while investors have been cutting back on shares of U.K. stock.
Foreign Secretary Liz Truss is set to become the next prime minister of the U.K. on Tuesday, after defeating former Chancellor of the Exchequer Rishi Sunak to take leadership of the Conservative Party. Truss has billed herself as Thatcher-esque, with a focus on reducing the size of the U.K.’s government and tax rates.
However, cutting taxes might lead to an increased need for foreign investments, which foreign investors may be unwilling to fund, the WSJ reported.
“The U.K. has always been kind of living beyond their means,” Guillaume Paillat, a multi asset portfolio manager at Aviva Investors, told the WSJ. “If you do get easier fiscal policy—more likely tax cuts—that means more imbalances.”
At time of writing, the value of the pound had risen 0.36% to $1.1515, while the dollar was worth £0.8684, according to Google Finance.
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