Pound tumbles to 37-year low against dollar amid warnings UK is in recession

Sterling tumbled to a 37-year low against the dollar yesterday amid warnings the UK is in recession. 

On the 30th anniversary of Black Wednesday, when a dramatic fall in sterling caused Britain to crash out of the European exchange rate mechanism (ERM), the pound hit $1.1351, a level not seen since 1985. 

It came after figures from the Office for National Statistics showed retail sales fell 1.6 per cent in August as the cost of living crunch squeezed households. 

At the same time, Goldman Sachs said the UK was already in recession and warned the Bank Holiday for the Queen’s funeral on Monday would add to the economic woes. 

Susannah Streeter, of investment platform Hargreaves Lansdown, said: ‘It’s Bleak Friday for the pound, amid worries the UK has hurtled into recession, as the cost-of-living crisis intensifies and confidence in the Government’s ability to prompt an economic turnaround fades.

‘It’s a chilling repeat of the dismal day, 30 years ago.’ 

The ERM was created 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 red-hot inflation and a weakening economy caused traders to ramp up their bets against sterling, it slumped below the lower bounds of the ERM. 

Despite the Bank of England buying billions of pounds to support the currency and hiking interest rates twice in a day, sterling fell further, humiliating then-Chancellor Norman Lamont. 

Now the Bank faces a fresh headache: how to fight eye-watering inflation while trying to minimise damage to the economy. 

While raising interest rates should help tame soaring prices, by encouraging saving instead of spending, it could hit growth. 

The Bank’s Monetary Policy Committee is due to hike rates again next week, with inflation at 9.9 per cent. There could be a 0.5 or 0.75 percentage point lift. 

The faltering economy presents a major headache for Liz Truss and her Chancellor Kwasi Kwarteng as he prepares to deliver an emergency ‘mini-Budget’ on Friday. Kwarteng will be hoping to boost growth with tax cuts while also reassuring markets that his plans will not result in a borrowing binge that will send the national debt soaring higher. 

Goldman Sachs thinks the UK is already in recession. Output fell 0.1 per cent in the second quarter of the year, and it thinks it will slide again in the third quarter. Matheus Dibo, an investment strategist at Goldman, said: ‘Monday’s holiday won’t aid the situation. People are not working.’ 

Two weeks ago, Goldman said inflation in the UK could hit 22 per cent, perplexing many in the City. Shortly before, Citi said it could reach 18 per cent. Since then the Government has launched a £100billionplus programme to cap energy bills and put a lid on inflation. 

Dibo said: ‘This will not be like the recession during the financial crisis. The Government’s fiscal response, the tight labour market and strong wage growth will mean the recession is shallow. 

‘Excess savings built up during the pandemic will help. It is likely to last three or four quarters, leading to a 1 per cent contraction.’ 

The ONS sales data showed shoppers bought less in August, with the 1.6 per cent fall the biggest since July 2021. Elizabeth Martins, economist at HSBC, said: ‘It underscores the need for support for households in the face of the inflation shock.’