Sterling plunged to a record low against the US dollar early on Monday morning after a raft of tax cuts announced by the Chancellor and higher interest rates knocked international confidence in the currency.
It fell by more than 4% to just 1.0327 dollars in early Asian trading, having already tumbled on Friday in the aftermath of Kwasi Kwarteng’s mini-budget.
It adds to a months-long fall in the value of the pound.
Here’s what it means for households across the UK and what if any benefits exist from a fall in the pound:
– How long will Britons be impacted?
The fall in value will mean higher prices for Britons over the coming months and years.
Samuel Tombs, an expert at Pantheon Economics, said inflation is likely to increase by around 0.5 percentage points in 2024 because of recent falls in the pound.
This means that every £1,000 that a family spends will be worth £5 less simply because of the drop in sterling, and will leave the average household around £150 worse off every year.
It also adds to runaway inflation, currently at nearly 10% thanks to the massive rise in energy bills facing households and businesses across the UK and Europe.
– How will it impact household spending?
Energy bills are one of the things that are likely to increase as the pound falls – the price of all of the gas that the UK uses is based on the dollar – even if the gas is produced in the UK.
Similarly, the fact that oil prices are based on the dollar means that petrol could be more expensive for UK drivers as it costs more to be imported by fuel companies.
British firms that import parts or products from across the world will face more costly currency rates, which will particularly impact areas such as food, drink and technology, where price increases could then be passed on to consumers.
For example, Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, suggested the fall of the pound may cause a rise in beer prices for UK customers.
He told BBC Radio 4’s Today programme that the drop was “worrying” for the British beer industry, which imports beer and hops from overseas.
Mortgage borrowers may also see their monthly bills climb higher amid concerns that pressure is building for the Bank of England base rate to be hiked further in order to steady the pound.
A raft of tax cuts unveiled on Friday last week have prompted concerns for the impact on inflation.
There have been suggestions the Bank of England may be forced to step in with an emergency interest rate hike.
– What does it mean for travelling abroad?
Foreign holidays are also likely to be more expensive, especially when visiting the US and other countries whose currencies the pound has dropped against.
The euro is also weak at the moment, so the cost of holidays in Europe has been less affected in the longer term, although the pound also struck an almost two-year-low against the euro on Monday.
Holidaymakers concerned about the fall in the value of the pound are being urged to “watch rate movements carefully”.
Nick Boden, head of foreign currency provider Post Office Travel Money, warned that “sterling’s volatility makes it impossible to predict how exchange rates will behave in the coming weeks”.
Purchasing 500 US dollars cost around £480 at some points on Monday, compared with approximately £440 on the same day last week.
– Are there any benefits from a fall in the pound?
It will now be cheaper for tourists to come to the UK, for example, helping to support a sector which was heavily impacted by the pandemic.
It is also likely to make British companies more competitive when they export around the world.
A cheaper pound means that it is cheaper for people around the world to buy British goods and services.
Weakness in the pound also makes the UK an attractive place for international investment, particularly from the US.
The UK has already seen a number of major acquisitions by US investors, ranging from the takeover of Chelsea Football Club by a consortium led by Todd Boehly to Advent International’s £2.6 billion buyout of Ultra Electronics.
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