The pound fell to a new 37-year low against the dollar as the chancellor revealed tens of billions of pounds in tax and spending cuts.
Sterling fell 0.89 percent to $1.115 as Kwasi Kwarteng outlined his “growth plan” for the UK economy on Friday morning.
It has since stabilized at around $1,119 but remains below the previous 37-year low hit earlier this week after concerns about rising interest rates hit the currency.
It comes after the Bank of England released another 0.5 percentage point interest rate hike to 2.25 percent on Thursday and warned the UK may already be in a recession.
The central bank previously projected the economy would grow in the current financial quarter, but said it now believes gross domestic product (GDP) will fall 0.1 percent, meaning the economy would have seen two consecutive quarters of decline: the technical definition of a recession. .
The chancellor, who was appointed on September 6, presented his first “mini-budget” at a time when the UK is facing a cost of living crisis, a recession, skyrocketing inflation and rising interest rates.
The 45 pence income tax rate paid by top earners in Britain will be scrapped, in the biggest surprise of Kwarteng’s plan.
The chancellor also fast-tracked a planned 1p cut in the base rate – from 20p to 19p – which will now take effect next April.
Kwarteng claimed that abolishing the 45 pence tax for people earning more than £150,000, already cut from 50 pence by George Osborne a decade ago, “will simplify the tax system and make Britain more competitive”.
The chancellor also confirmed that he is removing the cap on bankers’ bonuses, while reversing the increase in National Insurance contributions will also overwhelmingly benefit the wealthy.
Kwarteng said his economic vision would “turn the vicious cycle of stagnation into a virtuous cycle of growth.”
But shadow chancellor Rachel Reeves said the strategy amounts to an “admission of 12 years of economic failure” under successive Conservative governments.
By calling it a “fiscal event” rather than a full budget, Mr. Kwarteng avoided immediate scrutiny and forecasts from the Office of Budget Responsibility.
Economists had warned that the chancellor’s tax-cutting ambitions could put further pressure on the pound, which has also been hurt by the strong US dollar.
Former Bank of England policymaker Martin Weale warned that the new government’s economic plans would “end in tears”, with a run on the pound in an event similar to that seen in 1976.
ING economists also warned on Friday that the pound could fall further to 1.10 against the dollar amid difficulties in the gold market.
Chris Turner, Global Head of Markets at ING, said: “Looser fiscal policy and tighter monetary policy are generally a positive mix for a currency, if it can be financed with confidence.
“Here’s the rub: investors have doubts about the UK’s ability to finance this package, hence the underperformance of gilts.
“With the Bank of England committed to downsizing its gilt portfolio, the prospect of indigestion in the gilt market is real and should keep sterling vulnerable.”
Meanwhile, concerns about higher interest rates and pressure on consumer spending continued to weigh on the stock market.
The FTSE 100 fell 1.48 percent to 7,054.64 points in early trading, its lowest level since mid-July.
Additional Press Association Reports