Pound tumbles to 37-year low against dollar amid warnings UK is in recession
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On the 30th anniversary of Black Wednesday, the pound plunges to its 37-year low against the dollar amid warnings that the UK is in recession
- The pound reached $1,1351, a level not seen since 1985
- Figures from the Office for National Statistics show that retail sales fell by 1.6% in August
- Goldman Sachs said the UK is already in recession
- Bank Holiday for Queen’s Funeral Will Add to Economic Misery
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Sterling fell to a 37-year low against the dollar yesterday amid warnings that the UK is in recession.
On the 30th anniversary of Black Wednesday, when a dramatic fall in the British pound caused Britain to crash out of the European Exchange Rate Mechanism (ERM), the pound reached $1.1351, a level not seen since 1985.
It came after figures from the Office for National Statistics showed retail sales fell 1.6 percent in August as the cost of living put pressure on households.
At the same time, Goldman Sachs said the UK was already in recession and warned that the holiday before the Queen’s funeral on Monday would add to economic woes.
Susannah Streeter, of investment platform Hargreaves Lansdown, said: “It’s been a bleak Friday for the pound amid concerns that the UK has slipped into recession as the cost of living crisis deepens and confidence in the ability of the pound government to bring about an economic turnaround fades.
“It’s a chilling replay of the gloomy day 30 years ago.”
Founded in 1979, the ERM pegged several currencies, including the pound when the UK joined in 1990, to mitigate wide swings in exchange rates.
But in 1992, when scalding inflation and a weakening economy caused traders to ramp up their bets against sterling, it fell below the ERM lower bounds.
Despite the Bank of England buying billions of pounds to support the currency and raising interest rates twice a day, the pound continued to fall, humiliating then-Chancellor Norman Lamont.
Now the bank faces a new headache: how to combat the blinding inflation while minimizing damage to the economy.
While raising interest rates should help curb rising prices by encouraging saving rather than spending, it could affect growth.
The Bank’s Monetary Policy Committee will raise interest rates again next week, with inflation at 9.9 percent. There may be an increase of 0.5 or 0.75 percentage point.
The faltering economy is giving Liz Truss and her Chancellor Kwasi Kwarteng major headaches as he prepares to deliver a “mini emergency budget” on Friday. Kwarteng hopes to boost growth with tax cuts while reassuring markets that his plans will not lead to a debt crisis that will push up government debt.
Goldman Sachs thinks the UK is already in a recession. Production fell 0.1 percent in the second quarter of the year and is expected to fall again in the third quarter. Matheus Dibo, an investment strategist at Goldman, said: “Monday’s holiday won’t help the situation. People don’t work.’
Two weeks ago, Goldman said inflation in the UK could hit 22 percent, baffling many in the city. Shortly before that, Citi said it could reach 18 percent. Since then, the government has launched a more than £100 billion program to cut energy bills and bring inflation under control.
Dibo: ‘This will not be like the recession during the financial crisis. The government’s fiscal response, tight labor market and strong wage growth will keep the recession shallow.
“Too much saved savings built up during the pandemic will help. It will probably take three or four quarters, leading to a contraction of 1 percent.’
ONS sales data showed shoppers bought less in August, with the 1.6 percent drop being the largest since July 2021. Elizabeth Martins, economist at HSBC, said: “It underscores the need for support for households in light of the inflation shock.’