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    British pound slumps; know why and what happens next

    Synopsis

    The sterling fall is devastating for the British economy, but does it mean the same for the rest of the world? We found the reasons behind the steep fall of the pound sterling.

    British pound banknotesReuters
    The sterling fall is growing fears for the UK government's finances . The Great British Pound has been witnessing a steep decline in the past few weeks, becoming a cause of concern for the UK's economy. So why is the pound sterling falling sharply, and what would be the impact on the UK and other world economies? Let's find out.

    Why is the Pound Sterling falling?

    The recent record slump in the British currency has resulted in a crisis. The most apparent reason behind Pound's falling is the recently introduced tax cuts, among others, by the UK government. The drastic shift in the economic policy after the change of the government is forcing the foreign exchange markets to turn against the UK. Liz Truss, the prime minister of the UK, believes that additional cash can be used to fund investment and improve the overall productivity of the UK.
    Kwasi Kwarteng, the Chancellor of the Exchequer or the chief finance minister of the UK, has allegedly ignored a 9.9 per cent of the inflation rate, which the economic expert hinted toward further decline. He instead chose to announce the mini-budget on Friday that promises to inject more money into the economy. And this changed the sentiments of the currency traders, sending the GBP from USD 1.20 to USD 1.03 before jumping back to USD 1.06.



    What does the sharp decline in sterling mean for the UK and other countries?

    A sharp and abrupt fall in a currency creates uncertainty in any economy, sending the import and exports into dismay. These importers and exports expect a specific sum for their imports and receive a certain amount for their exports and services. If the currency is less worthy, the cost of importing goods becomes high. And with the change in currency rates, the loss in imports and exports becomes unavoidable.

    A sudden decline in the Pound would mean inflation in essential commodities such as oil and food, making the overall cost of living more expensive. As far as impact on countries goes, as the goods, services, and assets become cheaper, foreign investors will take this an opportunity to store more assets that would otherwise cost much more.

    Similarly, current investors will see a decline in the value of their assets, which would force them to sell them with the fear of the currency falling further. Tourists will have the extra money in hand following the improved exchange rates.


    FAQs.


    1. Is it the most significant tax cut to date?

    Ans. The sweeping tax cuts in the UK are the biggest since 1972.

    2. What is the estimated cost of tax cuts by the government?
    Ans. According to the British treasury, the tax cuts would wipe USD 45 billion from the annual government revenues over the next five years.


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    ( Originally published on Sep 27, 2022 )
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