British Pound (Currency)

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As Britain’s Economy Stumbles, One Sector Is Booming: Whisky

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LONDON — Britain’s economy has been buffeted by the effects of Brexit, the war in Ukraine and, most recently, the government’s dramatic reversal on a series of planned tax cuts that led to the resignation of Prime Minister Liz Truss. But for Scotland’s whisky producers, business is booming, and the British pound’s precipitous decline against major currencies is providing an extra boost, making whisky more affordable for buyers outside of Britain.“The currency has had a major effect — there’s no question about that,” said John Stirling, the co-founder of Arbikie Distillery in Scotland.The volume of whisky exports from Britain has grown over the past two years, including a 10.5 percent increase during the 12 months ending in July over the same period the year before, according to government data.At the Arbikie Distillery. Global demand for whisky has been growing.The surge in exports, driven by higher demand from the United States and the Asia-Pacific region, comes as 20 distilleries have opened in Scotland in the past six years, bringing the total number of distilleries there to 141.As demand for Scotch rises, the pound is trading near historically weak levels. Last month, the pound briefly sank to $1.035, a record low against the dollar in response to Ms. Truss’s economic overhaul, which included £45 billion ($50 billion) in unfunded tax cuts, spooking investors. Her government has since scrapped almost all of the planned cuts, but the pound’s decline has been part of a larger downward trend against major currencies, including those used in the United States, France, Taiwan, India, Singapore and China, the top destinations for Scotch. In the year ending in July, 18 percent of whisky exports, by value, went to the United States, according to government data.Britain is also facing systemic economic issues, such as weak productivity, low pay growth, a shortage of workers and unsteady business investment since the country voted in 2016 to leave the European Union. On Wednesday, the government reported that the country’s consumer prices had risen 10.1 percent in the year through September, driven in part by food prices that recorded their largest increase in more than 40 years.Mr. Perez-Solar with one of the casks at Arbikie Distillery. Twenty distilleries have opened in Scotland in the past six years.With high inflation expected to weigh on consumer spending and business investment, the International Monetary Fund predicted the British economy would go from 3.6 percent growth this year to a 0.3 percent contraction next year.But whisky companies like James Eadie have been able to weather the economic headwinds.“Overall if you look at the last two to three years, we’ve just been going through an incredibly buoyant time,” Rupert Patrick, the chief executive of James Eadie, said. “We’ve all been slightly scratching our heads saying, I wonder why it is so good at the moment.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    U.K. Government Plans an Update to Its Tax and Spending Agenda

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    After an earlier announcement sent markets into a tailspin, the prime minister and the chancellor are under pressure to restore fiscal credibility.After days of confusion, Britain’s government said on Monday that the date for its next fiscal policy announcement would be moved up nearly a month and that it would provide, at the same time, a much-anticipated independent assessment of the policies’ impact on the nation’s economy and public finances.The chancellor of the Exchequer, Kwasi Kwarteng, said he would publish his “medium-term fiscal plan” on Oct. 31, which would show how the government, under the new prime minister, Liz Truss, would bring down debt levels despite large spending plans and tax cuts that would be funded by borrowing.New economic and fiscal forecasts from the Office for Budget Responsibility, a government watchdog, are to be published the same day.The move is aimed to reassure financial markets and the public of the new government’s fiscal credibility. Its first major economic announcement, a speech by Mr. Kwarteng on Sept. 23, was dominated by unfunded tax cuts at a time of high inflation, and it quickly sent markets into a tailspin: The British pound hit a record low against the dollar, and turmoil in the bond market led to higher mortgage rates and intervention from the Bank of England to protect pension funds.Since then, the government has canceled its plan to abolish the top income tax rate for the highest earners — the most surprising tax-cutting measure announced last month — and tried to restore its fiscal credibility, while maintaining its commitment to an agenda of using tax cuts and deregulation to speed economic growth.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Truss’s Experiment Stumbles: Prime Minister Liz Truss says a mix of tax cuts and deregulation is needed to jump-start Britain’s sluggish economy. Investors, economists and some in her own party disagree.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Part of this rehabilitation effort included a promise to publish a more detailed fiscal plan focused on reducing debt and provide an independent analysis by the Office for Budget Responsibility. But the date was set for Nov. 23 — too long to wait, said fellow Conservative Party members, opposition lawmakers and investors.Liz Truss, the prime minister, with Mr. Kwarteng visiting a construction site last week. Pool photo by Stefan RousseauLast week, it was widely reported that the date would be moved forward, and Mr. Kwarteng denied this. On Monday, he confirmed that the announcement would indeed arrive on Oct. 31.Two weeks ago, in the immediate aftermath of Mr. Kwarteng’s policy speech, the pound plummeted to $1.035 and speculation grew that it could reach parity with the dollar. The cancellation of the top tax rate cut, which the government argued had become a distraction from its overall growth plan, helped the currency rebound a bit.But that recovery has stalled. On Monday, the pound was trading around $1.10 amid skepticism that the government’s plan would expand the economy as promised, and that instead large public spending cuts would be necessary.Fitch Ratings said on Monday that it expected the British economy to contract 1 percent next year, after “extreme volatility” in British financial markets and the prospect of “sharply higher” interest rates. Last month, it forecast a 0.2 percent decline for next year.“Rising funding costs, tighter financing conditions, including for mortgage borrowers, and increased uncertainty will outweigh the impact of looser fiscal policy” next year, analysts at the ratings agency wrote. They expect Britain’s economy to enter a recession in this quarter. The agency has already changed its ratings outlook for Britain to negative.That was just one of many rebukes of the government’s plans. For example, the International Monetary Fund encouraged the government to re-evaluate the tax cuts, which it said would increase inequality.But Ms. Truss, seeking to reverse years of sluggish growth and weak productivity, has been clear that she wants to run the economy differently than her predecessors. One early decision was to fire the top civil servant in the Treasury, Tom Scholar, a move that rattled some analysts. On Monday, the government announced his successor, James Bowler, who will transfer from the international trade department but spent two decades at the Treasury previously.Even as the government makes conciliatory moves, there are signs of distress in financial markets. On Monday, the Bank of England said it would expand its intervention in the bond market. The bank will increase the size of the daily auctions in a bond-buying program that was set up to support pensions funds, after tumult in this market threatened Britain’s financial stability.Over the last eight trading days, the bank bought only about 5 billion pounds of long-dated government bonds in total, despite setting a limit of £5 billion a day. With markets wondering what will happen when the bond-buying operation ends on Friday, the central bank announced that it would expand its support. As well as increasing the auction sizes, it will set up a new collateral facility to try to ease liquidity problems faced by the pension funds. That facility will continue beyond this week.The announcement appeared to do little to ease the markets. On Monday, Britain’s bond prices kept falling, while the yield on 30-year bonds rose to 4.72 percent, once again approaching highs seen during the worst of the bond rout after the last fiscal statement.The financial district in London. The new government’s first major economic announcement, on Sept. 23, quickly sent markets into a tailspin.Alex Ingram for The New York Times More

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    Why the British Pound Continues to Sink

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    Britain’s pound coin — rimmed in nickel and brass with an embossed image of Queen Elizabeth II at the center — could always be counted on to be significantly more valuable than the dollar.Such boasting rights effectively came to an end this week when the value of the pound sank to its lowest recorded level: £1 = $1.03 after falling more than 20 percent this year.The nearly one-to-one parity between the currencies sounded the close of a chapter in Britain’s history nearly as much as the metronomic footfalls of the procession that carried the queen’s funeral bier up the pavement to Windsor Castle.“The queen’s death for many people brought to an end a long era of which the soft power in the United Kingdom” was paramount, said Ian Goldin, professor of globalization and development at the University of Oxford. “The pound’s demise to its lowest level is sort of indicative of this broader decline in multiple dimensions.”The immediate cause of the pound’s alarming fall on Monday was the announcement of a spending and tax plan by Britain’s new Conservative government, which promised steep tax cuts that primarily benefited the wealthiest individuals along with expensive measures to help blunt the painful rise in energy prices on consumers and businesses.The sense of crisis ramped up Wednesday when the Bank of England intervened, in a rare move, and warned of “material risk to U.K. financial stability” from the government’s plan. The central bank said it would start buying British government bonds “on whatever scale is necessary” to stem a sell-off in British debt.The Bank of England’s emergency action seemed at odds with its efforts that began months ago to try to slow the nearly 10 percent annual inflation rate, which has lifted the price of essentials like petrol and food to painful levels.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Energy Bills to Soar: Gas and electric charges for most British households are set to rise 80 percent this fall, further squeezing consumers and stoking inflation.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The swooning pound this week has carried an unmistakable political message, amounting to a no-confidence vote by the world’s financial community in the economic strategy proposed by Prime Minister Liz Truss and her chancellor of the Exchequer, Kwasi Kwarteng.To Mr. Goldin, the pound’s journey indicates a decline in economic and political influence that accelerated when Britain voted to leave the European Union in 2016. In many respects, Britain already has the worst performing economy, aside from Russia, of the 38-member Organization for Economic Cooperation and Development.“It’s just a question of time before it falls out of the top 10 economies in the world,” Mr. Goldin said. Britain ranks sixth, having been surpassed by India.Eswar Prasad, an economist at Cornell University, said this latest plunge had delivered a bracing blow to Britain’s standing. A series of “self-inflicted wounds,” including Brexit and the government’s latest spending plan, have accelerated the pound’s slide and further endangered London’s status as a global financial center.Dozens of currencies, including the euro, the Japanese yen and the Chinese renminbi, have slumped in recent weeks. Rising interest rates and a relatively bright economic outlook in the United States combined with turmoil in the global economy have made investments in dollars particularly appealing.But the revival by the Truss government of an extreme version of Thatcher and Reagan-era “trickle-down” economic policies elicited a brutal response.“The problem isn’t that the U.K. budget was inflationary,” wrote Dario Perkins, a managing director at TS Lombard, a research firm, on Twitter. “It’s that it was moronic.”To some, the pound’s journey indicates a decline in Britain’s economic and political influence.Suzie Howell for The New York TimesDuring the more than 1,000 years in which the pound sterling has reigned as Britain’s national currency, it has suffered its share of ups and downs. Its value in the modern era could never match the value of an actual pound of silver, which in the 10th century could buy 15 cows.Over the centuries, British leaders have often gone to extraordinary lengths to protect the pound’s value, viewing its strength as a sign of the country’s economic power and influence. King Henry I issued a decree in 1125 ordering that those who produced substandard currency “lose their right hand and be castrated.”In the 1960s, the Labour government under Harold Wilson so resisted devaluing the pound — then set at a fixed rate of $2.80, high enough to be holding back the British economy — that he ordered cabinet papers discussing the idea to be burned. In 1967, the government finally cut its value by 14 percent to $2.40.Other economic crises thrashed the pound. In the 1970s, when oil prices skyrocketed and Britain’s inflation rate topped 25 percent, the government was compelled to ask the International Monetary Fund for a $3.9 billion loan. In the mid-1980s, when high U.S. interest rates and a Reagan administration spending spree jacked up the dollar’s value, the pound fell to a then record low.The pound’s dominance has been waning since the end of World War II. Today, the global economy is experiencing a particularly tumultuous time as it recovers from the aftermath of the coronavirus pandemic, supply chain breakdowns, Russia’s invasion of Ukraine, an energy shortage and soaring inflation.As Richard Portes, an economics professor at London Business School, said, currency exchanges have enormous swings over time. The euro was worth 82 cents in its early days, he recalled, and people referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.What might cause the pound to revive is not clear.The Truss government’s economic program has forcefully accelerated the pound’s slide — the latest in a series of what many economists consider egregious economic missteps that peaked with Brexit.Much depends on the Truss government.“The plunge in the pound is the result of policy choices, not some historical inevitability” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Whether this is a new, grim era or just an unfortunate interlude depends on whether they reverse course or are kicked out at the next election.”As it happens, the Bank of England is preparing to issue new pound bank notes and coins featuring King Charles III, at the very moment that the pound has dropped to record lows.“The death of the queen and the fall of the pound do seem jointly to signify decisively the end of an era,” Mr. Prasad of Cornell said. “These two events could be considered markers in a long historical procession in the British economy and the pound sterling becoming far less important than they once were.” More

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    To Calm Markets, Bank of England Will Buy Bonds ‘On Whatever Scale is Necessary’

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    The purchases are designed “to restore orderly market conditions,” the central bank said, after days of turmoil that followed the government’s plan for sweeping tax cuts and higher borrowing.The Bank of England said on Wednesday that it would temporarily buy British government bonds, a major intervention in financial markets after the new government’s fiscal plans sent borrowing costs soaring higher over the past few days.The news brought some relief to the bond market, but the British pound resumed its tumble, falling 1.7 percent against the dollar, to $1.05, back toward the record low reached on Monday.The British government’s plans to bolster economic growth by cutting taxes, especially for high earners, while spending heavily to protect households from rising energy costs has been resoundingly rejected by markets and economists, in part because of the large amount of borrowing it will require at a time of rising interest rates and high inflation. The International Monetary Fund unexpectedly made a statement about the British economy on Tuesday, urging the government to “re-evaluate” its plans.The sell-off in British assets since Friday, when the government’s plan was announced, has particularly affected bonds with long maturities, the Bank of England said. “Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” it said in a statement. This would lead to a reduction of the flow of credit to businesses and households, it added.“The purpose of these purchases will be to restore orderly market conditions,” the central bank added in its statement, which had an immediate effect on markets. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Energy Bills to Soar: Gas and electric charges for most British households are set to rise 80 percent this fall, further squeezing consumers and stoking inflation.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.Bond auctions would take place from Wednesday until Oct. 14.The yield on 10-year British government bonds on Wednesday climbed as high as 4.58 percent — the highest since early 2008 — before the central bank’s statement. Thirty-year yields had exceeded 5 percent for the first time since 2002.After the announcement bond yields dropped sharply, with the 30-year yield falling by more than half a percentage point to about 4.35 percent.The central bank’s statement has echoes of a famous promise by Mario Draghi in 2012, when as head of the European Central Bank he vowed to do “whatever it takes” to save the euro, which had come under severe pressure in the markets.Wednesday’s intervention in Britain came after a central bank committee had warned of the risks to Britain’s financial stability from dysfunction in the government bond market.The British government’s sweeping fiscal plan, presented without an independent fiscal and economic assessment, has sent investors fleeing from British assets. The pound fell to a record low against the U.S. dollar on Monday, and traders suspected that the central bank would be forced to raise rates quickly, which pushed up short- and long-term borrowing costs.The speed of the rise in bond yields had disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation.On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November.Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October. More