As the prime minister and chancellor took up their new roles recently, full inboxes were a widely publicised cause for concern.

With the country battling a cost of living crisis and soaring energy bills, consumers and business owners were looking to the country’s leaders to provide much-needed support.

The announcement of Liz Truss’s package for households was followed by her Energy Bill Relief Scheme aimed at commercial energy users. Then the spotlight fell on her new chancellor Kwasi Kwarteng.

Keep reading to find out what Kwarteng’s mini-Budget included, why it led to such a strong market reaction, and to his dismissal as chancellor. Plus, what that means for you and your finances.

Kwasi Kwarteng’s mini-Budget saw the pound plummet

Even before the details of Kwasi Kwarteng’s mini-Budget were announced, rumours about what the then-chancellor’s “fiscal event” might include saw the value of the pound plummet.

On 16 September, exactly 30 years after Black Wednesday, sterling hit its lowest level against the US dollar in 37 years.

This low of $1.135 was outstripped when Kwarteng unveiled £45 billion of tax cuts on 23 September. The scale of the borrowing required to fund these cuts saw global investors lose faith in the UK market, with the pound valued at just $1.035, its lowest figure since Britain switched to decimal in 1971.

Following a £2 billion U-turn on the mini-Budget’s most controversial measure – the abolishing of the 45% additional rate of Income Tax – the pound began to recover. Its sharp fall, though, does highlight how quickly economic changes can occur.

A low-value pound has consequences for us all, from higher mortgage repayments to increased costs of foreign travel and further pressure on rising household bills.

3 ways a falling pound influences your finances

1. You could see increases in already high prices

With inflation already high, a falling pound makes imported goods like food and components even more expensive for businesses to buy.

When the cost of raw materials goes up, some of that additional cost will likely be passed onto you, as the end consumer. This could be particularly hard to swallow for a country already experiencing a cost of living crisis.

An economic hangover from the coronavirus pandemic has been exacerbated by supply chain issues and Russia’s war in Ukraine. The result has been the fastest rise in prices in 40 years. With households already struggling, businesses will be loath to pass rising prices onto their customers. But they might find they don’t have a choice.

It’s worth noting too, that oil and gas prices are also based on the US dollar. This will affect household energy bills and the price of petrol at the pumps.

2. Your planned trip overseas could become more expensive

If you are planning a foreign holiday this winter, you might need to rethink your budget. At the very least, be prepared for your money to be worth significantly less than it might have been.

While the pound has fallen against other currencies too – including the euro – the effects will be particularly pronounced if you’re heading to the United States.

The spending money you’ve put aside won’t buy as many dollars and your money won’t stretch as far once you land.

A change in the value of the pound against other currencies can also affect airlines, so the prices of flights could alter over the coming months.

3. You could see the cost of your mortgage repayments rise

The sharp drop in the pound caused by the then-chancellor’s mini-Budget announcements caused some immediate headaches for the Bank of England (BoE).

Having already announced a £65 billion bond-buying spree – that’s £5 billion every day until mid-October – the BoE will need to look again at its base rate. This is because setting interest rates is one way the BoE can help to control inflation.

Inflation is currently high, at 9.9% for the 12 months to August 2022. This is down from a 10.1% peak in July that marked a 40-year high.

Having already increased its base rate at seven consecutive meetings since December 2021, the BoE recently confirmed a rise to 2.25%. A rising base rate increases the cost of borrowing for consumers and is particularly bad news if you are on a tracker or variable-rate mortgage.

You could see your monthly repayments rise. Other forms of borrowing, like car loans or credit card fees, could increase too.

This problem could stick around for some time, with the BBC recently asking if the base rate could rise to 5% and beyond by early next year.

Get in touch

During times of economic uncertainty, it can be easy to lose track of your long-term aims. Drowning out the noise and staying focused on your long-term goals is key.

With decades of experience in dealing with fluctuating markets and legislative change, our Chartered Financial Planners have the expertise to help you plan your long-term finances your way. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.