UK pound breaches $1.10 for the first time since 1985

Sterling fell against the euro and yen as well

Sterling was in freefall on Friday, slipping below the $1.10 mark. Bloomberg

The UK pound slid to a 37-year nadir against the US dollar as it dropped below the $1.10 threshold amid concerns that a £45 billion ($49.46bn) tax-cutting package from the government would worsen the UK's economic outlook.

The currency and stocks hit six-month lows after Chancellor Kwasi Kwarteng laid out a series of tax cuts aimed at boosting growth in Britain.

The finance minister called his mini-budget a “growth plan” for the UK economy but its initial impact was to send investors running.

Sterling fell by as much as 3.2 per cent to $1.0897, having started the day above $1.12, and other currencies also gained ground. A simultaneous sharp sell-off in government debts suggests that tackling inflation will be a hard task for UK authorities and that the currency market sees no easy way out for the Bank of England.

“The British pound is getting absolutely smashed today after the UK’s new economic reform announcements,” Naeem Aslam, chief market analyst at Ava Trade, told The National.

“Investors are losing confidence in the UK’s ability to control its finance, as the government continues to kick the can down the road.

“The UK’s government is avoiding reducing the country’s liabilities but under the current circumstances, it has very little option to do anything else.”

Britain's Chancellor of the Exchequer Kwasi Kwarteng unveils his mini-budget plan in the House of Commons in London on Friday. AFP/PRU

At 4pm UK time, the euro was up 1.8 per cent against the pound and sterling was down 2.7 per cent on the yen.

The FTSE 100 share index dropped 1.8 per cent, hitting its lowest level since March, while the domestically focused FTSE 250 index dropped 2.3 per cent.

The slides come after the Bank of England launched another 0.5 percentage point interest rate rise to 2.25 per cent on Thursday and warned the UK could already be in a recession.

The new UK spending package was estimated to cost £45bn by the financial year 2026/27, the Institute for Fiscal Studies said

Income tax cuts, a drop in property taxes, tax-free shopping for overseas visitors and the scrapping of a planned corporation tax rise are all aimed at giving households and businesses a boost.

'A significant, unfunded fiscal stimulus package'

Kwasi Kwarteng said his budget was a 'very good day for the UK' but refused to comment on sterling’s slide. EPA

The pound initially edged a little higher shortly after Mr Kwarteng's speech, before tumbling. It has shed 17 per cent against the US currency so far this year.

“Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging,” said Trevor Greetham, head of multi-asset at Royal London.

“Now, with spare capacity non-existent, inflation at a 40-year high and the Bank of England trying to cool things down, we are likely to see a policy tug-of-war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride."

The FTSE 100 dropped 1.3 per cent, reaching its weakest level since July 15, but shares in UK homebuilders jumped after Mr Kwarteng announced changes to property stamp duty.

Paul Johnson, the IFS director, said Mr Kwarteng's "gamble with fiscal sustainability" was the "biggest tax-cutting event since 1972".

Amid soaring interest rates, he warned that the Bank of England will surely further hike interest rates in response to the package.

Mr Johnson said: "Early signs are that the markets - who will have to lend the money required to plug the gap in the government's fiscal plans - aren't impressed. This is worrying."

Mr Johnson also warned that it was "inconceivable" that further public spending was not being announced, unless the Government will allow a "further deterioration" in public services.

"Presumably this Government would borrow for that also. Mr Kwarteng is not just gambling on a new strategy, he is betting the house," Mr Johnson said.

Mr Johnson warned that the package of tax cuts announced 50 years ago by then-chancellor Anthony Barber under a dash for growth "ended in disaster".

Mr Kwarteng committed to get debt falling as a percentage of GDP over the medium term, but the Treasury estimates the package would have to drive up GDP by 1 per cent on current forecasts every year for five years to cover the cost of the new tax cuts.

The bond market, with yields on the two-year gilt — the most-sensitive tool to any near-term shift in interest rate or borrowing expectations — registered its biggest one-day change since November 2009.

Mr Kwarteng said the release of his budget meant a "very good day for the UK" but he refused to comment on sterling’s slide.