Why a Weak British Pound Matters

The British pound on Monday briefly hit a record low against the dollar, extending losses after Britain’s new government on Friday announced a sweeping economic overhaul centered around tax cuts and deregulation. Citibank called the move a “huge, unfunded gamble for the U.K. economy.” The pound slumped as low at $1.035 on Monday, breaking the 1985 record, and although it bounced up from those depths it remains down about 19 percent this year. The pound has also fallen against the euro, although not by as much. In other markets, yields on British government bonds hit multiyear highs, meaning that borrowing costs are rising steeply as the government prepares to issue more debt to pay for subsidies on energy bills and other policies.

What does the weaker pound mean for the British economy? The drop in the pound poses concerns, since a weaker currency makes imports more expensive. It also makes it more expensive for Britons to travel abroad, since their money doesn’t go as far as it did before. British companies, many of which rely on materials imported from other countries, may raise prices to compensate for their higher costs — putting pressure on inflation, which is already running near 40-year highs. […] People and companies abroad buying goods and services from Britain could benefit from cheaper prices. And businesses in Britain that generate revenue elsewhere will earn more when that money is converted back into pounds. For Americans and others spending dollars or euros while traveling to Britain, their trips will be more affordable than they would have been even a few months ago. Further reading: Fed official warns UK tax cuts increase risk of global recession.