British pound hits 37-year low as UK economy slips | CNN Business


CNN Business

The British pound plunged to its 37-year low on Friday after new data showed shoppers are cutting back on spending as inflation puts pressure on household budgets, underlining fears that the economy is already contracting.

The currency fell below $1.14, its lowest level since 1985, after the Office for National Statistics said retail sales fell 1.6% month-on-month in August, the biggest drop since December 2021 and significantly worse than economists had recorded. expected.

“I think the UK is already in a recession,” said Michael Hewson, chief market analyst at CMC Markets UK.

The pound has been plagued by a string of weak economic data, as well as the steep rise in the US dollar, a safe-haven investment that is seeing inflows in times of uncertainty. The greenback is now near its highest level in about two decades against a basket of top currencies, bolstered by expectations of another major rate hike by the Federal Reserve next week.

But the economic outlook in the UK means the pound is suffering more than most. It has lost more than 15% of its value against the dollar this year, compared to a 12% drop in the euro.

A plan by Prime Minister Liz Truss to subsidize household and business energy bills could ease the pain this winter, but may not be enough to restore growth. The Bank of England has forecast an ongoing recession.

Investors are also alarmed by indications that the government will pay for its energy program, which would cost a staggering £150 billion ($171 billion), by sharply raising Britain’s public debt. Chancellor Kwasi Kwarteng is expected to provide more details next Friday.

The UK generally imports more than it exports. That means a weaker pound pushes up the cost of fuel, food and other goods, making it even more difficult for the Bank of England to control prices.

The central bank, which will make its final policy announcement on Thursday, is aggressive rate hikes in a determined effort to bring down inflation, which stood at 9.9% in August.

It now faces a huge dilemma: another major rise in borrowing costs could weigh on the economy even more. However, if the Fed does not keep up with the Fed, the pound could fall even lower.

Hewson said he believes the pound will now fall to $1.10 after breaking the $1.14 mark.

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