We have all seen in the news recently that the pound is weak against the dollar. But what does this mean? Why is the pound so weak? And, what does it mean for the average shopper?
The pound has been weak in recent years for a variety of reasons. However, the main reason currencies lose value is uncertainty. Consequently, the main issue arising from a currency that loses value is that it makes it less attractive to foreign investors. This is international economics at an elementary level.
So, the reason the pound is not very strong compared to the dollar is due to uncertainty in the United Kingdom. Currently, the dollar is the strongest currency in the world, a record low against the pound.
Why did the value of the pound suddenly drop?
The UK has been experiencing uncertainty since the country left the European Union following Brexit. However, the sudden drop can be attributed to the ‘mini-budget’ that was announced by the UK Chancellor in September 2022.
The mini-budget declared that there would be huge tax cuts to both high and low earners. This would have been paid for by the British government borrowing billions. Hence, investors were spooked by this announcement and paused investments in the UK.
Following the announcement, there was a domino effect in the financial markets. The pound plummeted in value, so the Bank of England had to raise interest rates sooner to offset the effects, leading to borrowing through loans and mortgages becoming more expensive.
What does a weak pound mean for shoppers?
The idea behind dropping the level of income tax was to encourage spending. Unfortunately, with the pound dropping in value importing products become more expensive. This expense is passed on to consumers. Therefore, the ‘real’ price of spending increases as consumers’ money does not stretch as far.
A weak pound affects everyone, consumers and business owners.
The price of food increasing is usually difficult to notice for the average consumer. But, the UK imports 46% of all its food, so a weak pound will affect how much we pay for our food.
The price of petrol is more noticeable. In the UK the price of petrol is decided against the dollar, so expect your local petrol station to appear to increase their prices again.
Gas prices will increase as gas is also based on the dollar. If you are on a flexible tariff with your supplier you are going to notice a more expensive gas bill.
Most technology, like mobile phones, laptops, and tablets is imported from factories outside the UK. In fact, before the mini-budget, it was reported that the iPhone 14 is more expensive in the UK compared to the USA. Now the difference will be even greater.
What will happen next?
The pound has already slightly recovered following a series of u-turns on the mini-budget by the UK Prime Minister, Liz Truss.
There is a widely accepted opinion that these tax cuts and government borrowing will slow long-term growth in the UK, with the Bank of England closely monitoring the situation. They said on Twitter that they would “not hesitate to change interest rates by as much as needed to return inflation to the 2% target”.
Is there any good news for a weak pound?
Yes! UK businesses that export to other countries are likely to see more interest. The cost of importing to the UK has increased, conversely, exporting out of the UK is cheaper for foreign companies.
The reason the Bank of England increases the interest rate is to encourage saving. So, if you are saving money you should get more money over time.
Global financial markets are complicated and there are many reasons for the value of a currency to drop. Such a sudden drop is unusual for a historically strong currency like the pound. That being said, a combination of general uncertainty and poor decisions by the UK government is why the pound is so weak against the dollar.