The Chancellor Kwasi Kwarteng delivered his first budget after which the pound plummeted to a 37-year low after he announced there will be billions of pounds of tax cuts.
The FTSE plummeted to its lowest in two months and the equity markets were also affected as sterling fell by 0.89% to $1.115 on Friday morning.
The FTSE lost 1.5% and the CAC declined 0.3% and the DAX fell by 0.6%, after the Chancellor unveiled the largest tax cuts in 50-years.
The Bank of England raised interest rates from 1.75% to 2.25% which is the highest level since 2008, and the bank are now expecting a 0.1% fall in GDP over this quarter, meaning the UK is in a recession.
The BoE has raised interest rates to their highest in 14 years and the bank’s Monetary Policy Committee (MPC) made the decision to address the soaring inflation rate.
Martin Weale the BoE’s former policy maker warned this will all “end in tears” amid Kwarteng’s announcement.
Chris Turner, global head of markets at ING, said, “Typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be confidently funded.
“Here is the rub – investors have doubts about the UK’s ability to fund this package, hence the gilt underperformance.
“With the Bank of England committed to reducing its gilt portfolio, the prospect of indigestion in the gilt market is a real one and one which should keep sterling vulnerable.”
Richard Hunter, head of markets at Interactive Investor, said, “A week dominated by further aggressive monetary tightening around the world has left equity markets bruised on a deteriorating outlook.
“Quite apart from the Federal Reserve’s expected 0.75% hike, there were also notable increases in interest rates in the likes of the UK and Switzerland, as the central bank merry-go-round continues to increase the likelihood of recession on a global scale.”