Why the recent fall in the value of the pound matters

Downing Street recently welcomed its fifth prime minister in six years. And many will be hoping that Rishi Sunak’s presence is a stabilising one – both politically and economically. 

The cost of living crisis and market uncertainty has been compounded by a late summer of political scandals, resignations, and on 23 September, Kwasi Kwarteng’s mini-Budget.

Kwarteng’s “fiscal event” proved to be his only major announcement as chancellor. 

Following his mini-Budget, the value of the pound plummeted against the US dollar and investor confidence crumbled. While it has since staged a partial recovery, it is still useful to understand what these currency fluctuations mean for your portfolio. 

Keep reading to find out more.

Mini-Budget market reaction saw the pound drop to a 50-year low

On 16 September 2022 – the 30th anniversary of Black Wednesday – the Guardian reported that the pound had reached a 37-year low. Its value was $1.1351.

Just a week later, on Friday 23 September, Kwasi Kwarteng unveiled the government’s Growth Plan 2022.

By the following Monday, the value of the pound relative to the US dollar had dropped close to $1.03, its lowest figure since UK decimalisation.

As overseas investors took flight, the Bank of England (BoE) was forced to step in. A government bond buyout of up to £65 billion was intended to stabilise markets and prevent panic among retirees as headlines suggested pensions schemes could “go bust”. More on this later…

Welcome reversals may have come too late for some

Following the departure of Kwasi Kwarteng, Jeremy Hunt stepped into the chancellor role.

He swiftly reversed many of the Growth Plan’s main policies (alongside the additional-rate Income Tax U-turn that Kwarteng himself was forced to reverse). 

Markets reacted favourably.

The next step is an autumn statement which is now due on 17 November and we will update you with any developments at that time.

What a falling pound means for your money

The effect on imports 

When the value of the pound drops, your money is worth less and the cost of buying goods from overseas grows. Imports become more expensive.

The headline drop in sterling was measured against the US dollar, which means the price of any commodities listed in dollars will grow. This includes gas and oil, meaning petrol prices could rise.

The AA recently found that UK drivers were already paying an extra £5 to fill the tank of a typical 55-litre family car.

Imported food and technology could also rise in price, hitting UK consumers already battling with a cost of living crisis and inflation at a 40-year high.

The effect on exports 

A weaker pound isn’t all bad news. Businesses that export goods overseas could see sales increase. This is because those goods have now become cheaper for foreign buyers. 

Worryingly, though, the UK imports more than it exports. This means that the growing price of imports and supply chain costs will have the biggest effect, which could be to push inflation even higher.

The effect on inflation and interest rates

Inflation has been rising steadily since the UK emerged from coronavirus lockdown in June 2021. Consumers keen to spend their accidental coronavirus savings were met with labour shortages and supply chain issues. Later came the impact of slow economic growth in China and Russia’s invasion of Ukraine.

UK inflation rocketed above the BoE’s 2% target and has reached double figures for the first time since 1982, recently returning to a 40-year high of 10.1%. 

This is particularly bad news if you are on a fixed income or have large cash savings. Rising prices mean that the buying power of your pension decreases while your cash savings, unable to keep pace with inflation, lose value in real terms. 

One way the BoE can combat inflation is by raising interest rates.

At its November meeting, the BoE raised its base rate for the eighth consecutive time since December 2021. It now stands at 3% and more rises are being signalled for 2023.

Higher interest rates should be good news for savers, but even if the rise is passed on it is unlikely to be enough to combat inflation

High rates will be more of a worry for those on a variable rate mortgage or on a fixed rate that is due to finish in the next year. We provide mortgage advice and can secure the best rates so please get in touch if your current fixed term is coming to an end and you are concerned.

The fallout from the mini-Budget saw lenders withdraw their deals and products, with the BBC reporting that the average two-year fixed rate mortgage rose from 4.74% on the day before the budget to 5.75% by Monday 3 October.

These hikes will have a huge impact if you are looking for a mortgage for the first time, or your current mortgage is about to end. You can read more about the effect of rising interest rates on your mortgage here. 

Get in touch 

While we have had a change of chancellor, prime minister, and policy since the mini-Budget announcement, its effects are still being felt.

If you’d like to know more about how the announcements affect your finances, speak to us now. 

Please email us at info@logicfinancialservices.co.uk or check with your adviser. 

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.