On the 30th anniversary of Black Wednesday, the pound falls to its lowest level in 37 years against the dollar as the UK is in recession
- The pound hit $1.1351, a level not seen since 1985
- Figures from the Office for National Statistics show retail sales fell 1.6% in August
- Goldman Sachs said the UK was already in recession
- Bank holiday for Queen’s funeral will add to economic hardship
The pound fell to a 37-year low against the dollar yesterday amid warnings that the UK is in recession.
On the 30th anniversary of Black Wednesday, when a dramatic fall in the pound sterling knocked Britain out of the European Exchange Rate Mechanism (ERM), the pound hit $1.1351, a level never before seen since 1985.
It came after figures from the Office for National Statistics showed retail sales fell 1.6% in August as the cost of living crisis weighed on households.
Meanwhile, Goldman Sachs said the UK was already in recession and warned the Queen’s funeral holiday on Monday would add to economic hardship.
Susannah Streeter, of investment platform Hargreaves Lansdown, said: ‘It’s a dark Friday for the pound, amid concerns the UK has tumbled into recession, as the cost of living crisis intensifies and confidence in the government’s ability to bring about economic recovery fades.
“It’s a chilling repeat of the gloomy day 30 years ago.”
The ERM was established in 1979 and linked several currencies, including the pound when the UK joined in 1990, to reduce large fluctuations in exchange rates.
But in 1992, as searing inflation and a weakening economy prompted traders to increase their bets against the pound, it crashed below the lower limits of the ERM.
Although the Bank of England bought billions of pounds to prop up the currency and raised interest rates twice a day, the pound fell again, humiliating then-Chancellor Norman Lamont.
Today, the Bank faces a new puzzle: how to combat soaring inflation while trying to minimize damage to the economy.
While rising interest rates should help keep soaring prices in check, by encouraging saving instead of spending, it could hurt growth.
The Bank’s Monetary Policy Committee is expected to raise rates again next week, with inflation at 9.9%. There could be an increase of 0.5 or 0.75 percentage points.
The faltering economy presents a major headache for Liz Truss and her Chancellor Kwasi Kwarteng as he prepares to present an emergency ‘mini budget’ on Friday. Kwarteng hopes to spur growth with tax cuts while reassuring markets that his plans will not lead to a borrowing spree that will drive up the national debt.
Goldman Sachs thinks the UK is already in recession. Production fell 0.1% in the second quarter of the year, and it thinks it will fall again in the third quarter. Matheus Dibo, investment strategist at Goldman, said: “Monday’s vacation won’t help the situation.” People don’t work.
Two weeks ago, Goldman said UK inflation could hit 22%, leaving many in the city baffled. Shortly before, Citi said it could reach 18%. Since then, the government has launched a more than £100 billion program to cap energy bills and limit inflation.
Dibo said: “It won’t be like the recession during the financial crisis. The government’s fiscal response, tight labor market and strong wage growth will mean the recession will be shallow.
“The excess savings accumulated during the pandemic will help. It should last three or four quarters, resulting in a contraction of 1%”.
Sales data from the ONS showed shoppers bought less in August, with the 1.6 per cent fall the biggest since July 2021. Elizabeth Martins, an economist at HSBC, said: “It underscores the need to support households in the face of the inflationary shock.