The British pound falls again after the IMF’s stinging attack on the UK’s $48 billion tax-cutting plan
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The British pound fell against the dollar again Wednesday after the International Monetary Fund warned that the UK government’s tax-cutting plans could derail the Bank of England’s efforts to cool inflation.
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In a rare intervention Tuesday, the global financial institution sharply criticized the planned debt-financed tax cuts, worth 45 billion pounds ($48 billion). It said it was closely monitoring economic developments in the UK and was engaging with authorities.
Meanwhile, global ratings agency Moody’s warned Tuesday the largely unfunded tax cuts were “credit negative”, and could lead to higher interest rates and larger budget deficits, Reuters reported.
Sterling dropped as much as 0.93% to $1.0633 in early trading and was down 0.71% at $1.0658 at last check.
“We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures,” the IMF said in its statement.
“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” it said.
The pound’s plummet to a record low of $1.0350 on Monday led to calls for the BoE to step in with an emergency interest rate hike, and rattled UK stocks and other financial markets. In response, the BoE said it “will not hesitate” to hike more aggressively at its next gathering in November.
The UK’s central bank last week raised interest rates for the seventh time this year, as it tries to tame inflation running close to a four-decade high at 9.9%.
But economists have warned that the fall in value of the pound will make it more expensive for the UK to import fuel and food, driving up both inflation and wealth inequality.
The US dollar index hit a two-decade high Wednesday as the pound slipped. The index, which tracks the greenback against six alternative currencies including the pound, peaked at 114.76 and was up 0.46% to 114.64 at last check.
In its release, Moody’s said the fiscal stimulus was likely to add to the already double-digit inflation in the UK, especially if the pound stays close to record lows. That could prompt the BoE to be more aggressive in its monetary tightening, it said, per Reuters.
“A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability,” Moody’s said.
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