Pound stabilizes but turmoil continues for UK economy

LONDON (AP) – The British pound stabilized in Asian trading on Tuesday after falling to a record low a day earlier as the Bank of England and the UK government tried to calm markets nervous about a volatile UK economy were.

The instability began to have an impact on the real world, with several UK mortgage lenders walking out of business amid fears that interest rates could soon rise sharply.

The pound was trading at around $1.08 on Tuesday morning. On Monday, it plummeted to $1.0373, the lowest level since the currency’s decimalization in 1971, amid fears that tax cuts announced by Treasury chief Kwasi Kwarteng on Friday would swell government debt and fuel inflation further.

Late Monday, the central bank said it was monitoring markets “closely” and would not hesitate to raise rates at its next meeting in November to curb inflation, which stands at 9.9%.

The UK Treasury also tried to reassure markets by saying it would present a medium-term fiscal plan on November 23 alongside an economic forecast from the independent Office for Budget Responsibility.

The statements did little to assuage concerns over the government’s economic policy as the pound stayed well below the $1.12 level it was holding before Kwarteng’s announcement on Friday.

Some analysts warned that the bank’s and Treasury Department’s statements were “too little, too late”.

“There is no rate hike today and speculators will relish the prospect of two months of inactivity from the Bank of England if the statement is taken at face value,” said Alastair George, Edison Group’s chief investment strategist.

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The government plans to cut £45 billion ($49 billion) in taxes while spending more than £60 billion to limit energy prices that are causing a cost-of-living crisis.

Kmacheng and Prime Minister Liz Truss, who replaced Boris Johnson as prime minister on September 6, are betting that lower taxes and less bureaucracy will eventually generate enough additional tax revenue to cover government spending. But many economists think the gamble is unlikely to pay off.

Torsten Bell, head of the Resolution Foundation, an economic think tank focused on inequality, said markets would look at the UK government’s plans “and say serious policymaking doesn’t look like it”.

“The world we’re heading into is a bumpy couple of weeks,” he told Sky News. Kwarteng “is going to have a pretty tough time now because he’s made plans now to balance the books in November. It’s going to be very difficult.”

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