Sterling crisis: what the falling value of the pound means for you

Markets have reacted poorly to the Government’s tax-cutting plans, which could indirectly impact everything from the price of filling up your motor to the cost of holidaying abroad.

The pound has gotten off to an extraordinary start this week, crashing to levels not seen in decades.

The early trade seen in the Asian markets saw the value of the pound drop to around $1.04, the first time it has been so low since 1985, though it has somewhat recovered since to around £1.08 at the time of writing (08:17 on 27/09/22).

To put that drop into context, a month ago it stood at $1.17, while a year ago sterling was worth $1.37.

Why is the pound crashing?

Last week saw Kwasi Kwarteng, the new Chancellor of the Exchequer, deliver a ‘fiscal event’ from the despatch box.

We couldn’t call it a Budget since it didn’t have the official growth forecasts from the Office for Budget Responsibility, though it was more newsworthy than many traditional budgets, given the raft of tax cuts included within the speech.

However, very shortly after Kwarteng sat down in the House of Commons, the value of the pound started falling.

This wasn’t a coincidence. In order to fund those tax cuts, the Government plans to rack up additional borrowing, and it would appear that currency traders aren’t convinced by the maths involved, given the scale of inflation being seen not only in the UK but across the globe.

Essentially, there’s a lack of confidence in the decisions being made, and that’s hurting the value of the pound.

What about Base Rate?

Kwarteng’s speech came hot on the heels of the latest Base Rate decision from the Bank of England, which elected to increase Base Rate to 2.25%, its highest level since late 2008.

The Bank of England has increased Base Rate a handful of times already this year, in an attempt to get inflation under control.

While the Bank has a target of 2% for inflation, we are seeing costs rising far more rapidly, with the latest consumer prices index measurement hitting a painful 9.9%.

However, the Government’s tax cuts and energy bailout plan appear to act counter to that, freeing up cash for households in order to support demand, which will in turn support inflation.

As a result, there is speculation within the markets that the Bank will announce an emergency meeting this week to look at another increase to Base Rate, in the hope of stabilising the currency.

Indeed, the markets are now seen to be expecting Base Rate to hit a whopping 6% in the first half of next year.

Isn’t this just the strength of the dollar?

It’s worth pointing out that the dollar has been improving in health in its own right this year, and some have suggested that the plummeting value of the pound is as much about what’s happening in the US as over here.

This isn’t entirely accurate, however, since the pound has also plummeted in value against other major currencies, including the euro which is having its own issues.

Yes, the dollar is strong, but that doesn’t explain away the fall in the pound.

What the falling value of the pound means for you

It can be easy to feel a little disengaged from all this. Unless you are about to head off on holiday to the States, does it really matter what the pound is worth compared to the dollar?

Unfortunately, there is a far more direct impact on your money, even if you aren’t planning on a trip to Florida, New York or the like any time soon.

For example, many goods that are sold across the world ‒ like oil ‒ are listed in US dollars.

As a result, the falling value of the pound means that those goods are suddenly more expensive.

So to continue with that oil example, even if the price of oil goes down in dollars, as it has done of late, that price fall will not necessarily translate into it becoming cheaper to fill up your car with petrol.

And then there are imports.

As a country, we import more than we produce at home, and the cost of bringing in those goods and services will now cost more because of what’s happening to sterling.

Businesses who are already feeling the pinch are inevitably going to have to pass at least some of those costs on to their customers, meaning we will continue to see higher prices on the items we buy.

There is an impact on savers, as well. The target for all savers is to get an inflation-beating return from their savings account, as otherwise, their money is losing value in real terms.

Finding an account that pays more than the rate of inflation is impossible currently, and the chances of doing so aren’t about to improve dramatically if inflation increases further off the back of what’s happening to the pound.

Of course, there are winners too. Businesses that export or conduct a lot of business overseas will see their revenues increase because of the currency situation.

If you happen to have a host of these businesses in your investment portfolio or your pension, then you may see returns increase.

If you’re interested in buying property in the UK from overseas, then the cost of doing so will fall thanks to the value of the pound as well.

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What can you do about the pound crisis?

If you are about to go on holiday, then it’s more important then ever to shop around in order to get the best possible deal on your currency.

Leaving it to the last minute and changing the money up at the airport is never a great move, but will be particularly painful.

For those on variable mortgages, or approaching the end of a fixed term, then last week’s Base Rate hike alone should have focused your mind on your remortgaging options.

Mortgage rates have already risen significantly in 2022 and that’s only likely to continue, so it makes sense to get on with finding an affordable deal as quickly as possible.

Otherwise, it’s simply a case of being more watchful in how and where you spend your money.

Household budgets across the country are already extremely stretched thanks to the cost of living crisis, but that situation doesn’t look set to improve, even with the energy price guarantee now in place.

Being thorough in your budgets, and finding ways to reduce outgoings ‒ such as through moving to a cheaper supermarket, or ditching unused subscriptions ‒ is absolutely crucial.