A fall in the value of the pound increases the price of goods and services imported into the UK from overseas – because when the pound is weak against the dollar or euro, for example, it costs more for companies in the UK to buy things such as food, raw materials or parts from abroad.
If businesses pass on those higher costs to customers, a weaker pound can help push up inflation – the rate at which prices rise. Also, for Britons traveling overseas, changes in the pound’s value affect how far their money will go abroad.
The Sterling has also been under pressure recently due to the strength of the US dollar. However, the pound’s weakness in recent weeks has been mostly tied to mounting concerns about the outlook for the UK’s economy and public finances.
Last month, the sterling plunged to a record low against the dollar and government borrowing costs rose sharply in the aftermath of Liz Truss’s mini-budget last.
Investors were spooked after then-Chancellor Kwasi Kwarteng promised major tax cuts without saying how they would be paid for – something Mr. Rishi Sunak warned would happen during this summer’s Tory leadership contest.
The official rate of inflation rose to 10.1% last month and is expected to climb further.
The UK is also borrowing billions of pounds to limit energy bill rises for households and businesses.
Borrowing – the difference between spending and tax income – was £20bn in September, up £2.2bn from a year earlier, the Office for National Statistics (ONS) said.
It was the second-highest September borrowing since monthly records began in 1993.
The Institute for Fiscal Studies think-tank predicted borrowing this year could reach £194bn, almost double the figure previously forecast by The Office For Budget Responsibility (OBR).
Can Rishi Sunak’s position as the frontrunner help calm the markets?
Last week, new Chancellor Jeremy Hunt withdrew almost all of Ms. Truss’s tax cuts in a bid to stabilize the financial markets but markets have remained jittery.
Mr. Hunt – who is backing Mr. Sunak – is due to set out his economic plan for taxes and spending on 31 October, although there are reports it could be delayed due to the leadership race.
Megan Greene, a global chief economist at the Kroll Institute consultancy, told the BBC’s Today program that Mr. Sunak’s position as the frontrunner “should help” calm the markets.
“Two weeks ago, the UK looked completely un-investable,” she said, though she warned investors were “still wary”. “The UK has a really tough line to walk,” she said.
“On the one hand it can’t provide these budgets that are fiscally irresponsible, or that seem fiscally irresponsible, we’ve seen what happens with the market then, but equally Rishi Sunak is going to come and probably announce a lot of austerities and he can’t go too far on that end either because then the markets will look at that and think the UK is never going to grow.
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“Even without all the political drama, the economic environment in the UK is incredibly difficult.”
- Source: BBC News