3 ways a weak pound could directly affect your money

18 October 2022

You will be well aware by now that, following former chancellor Kwasi Kwarteng’s “mini-Budget” announcement on 23 September 2022, the value of the pound rapidly declined.

The chancellor announced a wide range of tax cuts in his speech, claiming that “growth is not as high as it should be”.

The chancellor then proceeded to abolish the 45% higher-rate tax bracket, cut Income Tax by 1p for basic-rate earners, and slash Stamp Duty too. 

In the weeks following these unprecedented changes, Kwarteng was replaced as chancellor by Jeremy Hunt. In a snap statement on 17 October, Hunt reversed many of Kwarteng’s decisions. 

For a full breakdown of these events, you can read our insights on the mini-Budget and the U-turns that followed. 

Crucially, the effects of Kwarteng’s wide-ranging tax cuts spooked the international markets, causing the pound to plummet. On 26 September, sterling reached an all-time low against the dollar of $1.0327. 

In response, the Bank of England (BoE) said it “would not hesitate” to intervene in an attempt to stabilise the markets. Reuters reports that the BoE pledged to buy £5 billion in UK gilt bonds every day between 28 September and 14 October 2022.

Despite efforts from the BoE and a slight rebound in sterling’s value, while the value of the pound remains low you could be concerned about what this means for your own finances. 

Read on to find out three ways a weak pound could directly affect your money. 

1. A weak pound could affect the price of fuel, food, and holidays

If you plan to travel abroad in the coming months, you could be surprised by the cost of overseas travel – especially to countries that use US dollars.

Indeed, with the pound at $1.13 as of 18 October 2022, compared with its value of $1.31 just six months earlier, and $1.37 in September 2021, exchanging your sterling for dollars could be an expensive enterprise. 

When the pound is weak, your money will not go as far as before when spending abroad – so it is important to budget according to the low value of the pound when heading overseas. 

Unfortunately, it isn’t just travel costs that will rise when the pound dips in value.

Indeed, any commodities regularly imported into the UK, including fuel, are likely to increase in price thanks to the weakening pound. When it decreases, the pound’s purchasing power is compromised – and often consumers pay the price.

In addition, the government reports that in 2020, the UK imported 40% of its food; some sources report this figure is much higher. 

So, it could be that food prices see even further increases, following the 40-year high in inflation we have already experienced so far in 2022. 

If you are worried about rising prices, it could be constructive to discuss your concerns with your financial planner. We can help bring peace of mind in these turbulent times.

2. When the pound loses value, your investments could be affected

Of course, a weak pound is a source of unease for investors all around the world. 

Following Kwarteng’s tax cut announcements, a swathe of international investors disposed of their British assets, for fear of the negative economic ramifications of the chancellor’s plan.

Indeed, over the past few months, you could have noticed your own portfolio reduce in value. Market volatility has been present since the Covid-19 pandemic hit in 2020, so you might feel worried that this latest spell of volatility could push your investments into further disarray.

However, as with all periods of volatility, markets usually rebound. 

In response to the pound’s unprecedented fall, the BoE stated the Monetary Policy Committee (MPC) “would not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the median term”. 

So, it’s important to stay calm when noticing your investments experience a downturn; ultimately, your long-term investments are highly likely to rebound in value as the economy stabilises.

3. If you run a business, your overhead costs may increase

As a business owner, sole trader, or manager within a larger firm, you will know that a declining pound can have serious consequences for corporate costs – particularly if your business operates internationally.

You might have already noticed that the importing of raw materials has become more expensive. These could include:

• Electrical hardware
• Fabrics, like wool, cotton, silk, or denim
• Fuel
• Food sources.

Similarly, if you or your colleagues are required to travel overseas regularly, a dip in the value of the pound could have an impact on your overhead costs in the coming months. 

As a result, you could consider switching to virtual communication in lieu of international travel, as you may have done during the Covid-19 pandemic, to cut costs. 

On a larger scale, if your business has overseas investors, you may be required to provide reassurance while the pound remains low. For a discussion about soothing the worries of concerned corporate investors, contact your financial planner today.

Get in touch

If you have questions or concerns about your finances while the value of the pound remains low, you’re not alone. For guidance you can rely on, email info@depledgeswm.com or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.