Metis AM
Following the announcement of tax cuts by the chancellor, Kwasi Kwarteng, the pound’s value fell to a record low against the American dollar. At its lowest, sterling fell close to $1.03.
Surging inflation, a recession on the horizon, possible tax cuts and increased public spending all exacerbated matters, while there has also been a recent surge in the dollar.
Stronger than expected US cost of living data has caused a rise in interest rates in America, making the dollar more attractive to investors as they will likely get a better return on their money. This data has caused sterling to lose its value against the dollar.
Then, due to the chancellor’s tax cuts, the pound’s value went into free fall.
The sharp fall in the pound has happened due to panicked international investors
In response to the UK government’s decision to make many tax cuts, which will be paid for by more borrowing, international investors have become concerned.
Most economists believe this will leave the UK with higher debts over the long term.
After the chancellor’s initial mini-Budget, he then hinted at further tax cuts in the new year, which heightened the fears of already nervous investors over inflation increasing dramatically.
The sudden and sharp drop in the pound seen after the mini-Budget creates uncertainty for everyone. Here is our guide on what a weak pound will mean for you.
Shares in some major blue chip British companies have increased in value
According to Fidelity, parts of the UK stock market that have been heavily loaded with dollar earners and companies with defensive earnings have served investors relatively well even as many international markets have fallen.
While their shares have fallen back slightly in recent days, in 2022 the likes of BP, Shell, and BAE Systems have been stand-out performers boosted by the increased value of the dollar-priced commodities they produce.
The weak sterling means the value of their profits is higher in pound terms than last year.
UK businesses that export have goods that are more cost-effective for foreign buyers
If you own a UK business that exports its goods, a lower value pound will make your products more cost-effective for foreign buyers.
This could potentially be good for business if it increases orders from abroad.
Savers will likely make a greater return
You may have savings accounts that have not been making a good return over the past few years due to low interest rates.
The falling value of the pound is likely to push inflation up and, to counter a further rise in inflation, the Bank of England (BoE) will likely increase interest rates again. This could result in a rise in the interest rate on your savings accounts, increasing your returns.
Two-year UK government bonds are now offering yields of 3%, while savings account rates are increasing on the high street. Now could be the perfect time to see whether your savings account offers you the best returns on your money.
An increase in the cost of goods and services that are imported
The weaker pound means imported goods to the UK are becoming more expensive. Inflation has already caused a rise in the price of products and the weaker pound is likely just to magnify this.
As the UK imports 50% of its food, the food you regularly buy and consume will likely become more expensive.
There could also be a spike in prices of goods that come from American companies. The recently launched iPhone 14 Pro is up to £150 more expensive in Britain, compared to the previous iPhone 13 Pro. As reported in the Telegraph, analysts believe this is partly due to the weak pound and strong dollar.
Already this year we have seen petrol and diesel prices skyrocket. Oil and gas are also imported to the UK and priced in dollars in international commodity markets. With the pound becoming weaker and the dollar becoming stronger in value, this will likely mean, yet again, the cost to fill up your car will increase.
Travelling overseas will likely become more expensive
If you have holidays arranged, it’s likely that the exchange rate between the pound and the currency you require will not be as good as previously. If you are travelling to the US, those trips will now be more expensive due to the strong dollar compared to the weak pound.
As Forbes reports, the pound has fallen by more than 20% against the dollar in 2022, and almost 25% from its peak in the middle of last year.
However, even though foreign holidays may now be more expensive, it is now cheaper for people to visit the UK. This could lead to an increase in UK tourism, improving business for many people and companies in the tourism sector.
Banks have pulled mortgages from sale
Due to the weak pound making imports more expensive and the mini-Budget likely leading to further inflation, the BoE are likely to raise interest rates even higher than expected. This will further increase the cost of borrowing, concerning many mortgage borrowers.
Information released by Moneyfacts shows that nearly 1,000 mortgage deals were pulled from the market in the days immediately following the mini-Budget. HSBC, Halifax, and Santander are among the biggest banks to reduce their lending options.
Be aware if you have a variable-rate mortgage, either a tracker mortgage or a standard variable rate (SVR) mortgage, your repayments will likely increase.
The next steps and the implications for you
To mitigate the fall in the pound, the BoE may raise interest rates more than previously expected.
This could increase the cost of borrowing for households and businesses.
As well as possibly increasing the interest rates, the BoE has also taken emergency action to improve the financial stability of the UK.
The Bank revealed it would buy as many long-dated government bonds as needed from now until mid-October to try and stabilise the financial market. They also have stated they will postpone the sale of bonds acquired during the previous financial crisis and the Covid-19 crisis.
This has resulted in the value of the pound increasing slightly, but it is still down on its value from this point last year.
Get in touch
If you have concerns about the falling pound and the effect this could have on your wealth, please email enquiries@metiswealth.co.uk or call 0345 450 5670.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
