(qlmbusinessnews.com . Fri 10th Jan, 2025) London, UK —

Pound Hits Lowest Point in Over a Year as UK Borrowing Costs Surge

The British pound has plunged to its lowest level in over a year, coinciding with UK borrowing costs reaching their highest levels in 16 years. This financial turbulence has sparked warnings from economists about potential tax hikes or spending cuts as the government strives to uphold its rule against borrowing for day-to-day expenditure.

Addressing an urgent Commons question, Treasury Minister Darren Jones dismissed the need for emergency measures, asserting that markets “continue to function in an orderly way.” However, Shadow Chancellor Mel Stride criticised the government's fiscal strategy, stating, “Higher debt and lower growth are causing significant concerns among the public, businesses, and markets.”

Sterling fell 0.9% against the dollar on Thursday, settling at $1.226, a decline attributed to growing doubts about the strength of the UK economy. While higher borrowing costs often support the currency, wider economic apprehensions have overshadowed this effect.

The government typically borrows to bridge the gap between tax revenue and spending, primarily through the sale of bonds. However, rising yields on government bonds—commonly known as gilts—have led to increased interest payments on the national debt, further straining public finances.

Pound Plummets to 16-Year Low

Mohamed El-Erian, chief economic adviser at Allianz, explained recently while on a Radio program that these developments could erode tax revenues and hinder economic growth. “The Chancellor may be forced to consider raising taxes or implementing deeper spending cuts, which will affect everyone,” he warned.

Despite these pressures, the government has withheld specific details on future fiscal measures, deferring to the Office for Budget Responsibility’s (OBR) upcoming borrowing forecast in March.

Recent economic data paints a bleak picture, with zero growth recorded between July and September and inflation continuing to climb. In December, the Bank of England maintained interest rates at 4.75%, citing ongoing economic uncertainty and a weaker-than-expected performance in late 2024.

The dual challenges of a weakening pound and escalating borrowing costs underscore the growing strain on the UK economy as policymakers navigate turbulent financial waters.

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