The Implications of a Weakening U.K. Pound

Sep 13, 2022 | 17:32 GMT

A photo illustration shows banknotes of the U.K. pound on June 28, 2020. 

A photo illustration shows banknotes of the U.K. pound. 

(Jim Dyson/Getty Images)

While a weakening pound underscores the United Kingdom's current economic problems, a full-blown financial crisis remains unlikely in the short-to-medium term, as the U.K. currency's depreciation will not immediately worsen government debt dynamics -- thereby buying time for a more gradual macroeconomic adjustment. The U.K. pound's value relative to the U.S. dollar fell to a 37-year low on Sept. 4, driven by a combination of high energy prices, a worsening underlying fiscal deficit and high government debt levels. The United Kingdom's dependence on foreign capital inflows makes its currency more vulnerable to Ukraine-related global price shocks than those of other advanced countries, with inflation in the U.K. reaching a 40-year high of over 10% in July. The resulting cost of living crisis has pushed the U.K. government to fund new measures aimed at mitigating the financial toll on households -- leading to increased public spending that will put upward pressure...

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