Understanding the Pound’s Sudden Crash

Britain’s most radical package of tax cuts since 1972, combined with plans for large-scale borrowing, have taken financial markets by surprise and triggered a slump in the pound to a record low. The unorthodox measures are designed to kick-start economic growth. Yet the mini-budget unveiled on Sept. 23 raised fears that it could exacerbate inflation, undermine state finances and even cause a full-scale run on the currency, putting pressure on the central bank to step in.

The tax cuts went further than economists expected, trimming the top rate of income tax along with corporate tax and other levies. Liz Truss, who took over as prime minister less than three weeks earlier, is arguing that the changes will turbo-charge the economy, stave off a recession and shake the UK out of a decade of underperformance. Soon after the plans were announced by her Chancellor of the Exchequer, Kwasi Kwarteng, the pound slid more than 3% to its lowest since 1985. His comment two days later in a BBC interview that there was “more to come” sent the currency briefly tumbling almost 5% further to an all-time low of $1.0350, before recovering back above $1.07.