UK prime minister says pound's slump is due to fallout from Russia-Ukraine war as she defends tax cuts in aftermath of market turmoil

liz truss
Lord Chancellor Liz Truss.Reuters
  • UK prime minister Liz Truss defended the plan to cut taxes after the plan caused chaos in markets.

  • She blamed the pound's slump on the fallout from Russia-Ukraine war.

  • "Currencies are under pressure around the world," Truss said.

UK prime minister Liz Truss said the pound's slump last week was due to the fallout from the Russia-Ukraine war, defending newly unveiled tax cuts days after a spasm of turmoil in the country's currency and government bond markets.

The pound plunged to a 37-year low on Friday after Truss announced the UK's new mini-budget, which includes cutting taxes for the highest earners and slashing planned corporate tax hikes. Turmoil stemming from a loss of confidence in the ability of the UK economy to withstand further inflation and concern over government debt led to the steep decline in the pound and a sell-off in UK government bonds.

But the slump in the UK currency can't be blamed on the new tax plan, Truss said to the BBC on Thursday, per the Wall Street Journal. She pointed instead to the Russia-Ukraine war and its impact on the global economy, particularly its effect on energy prices around the world.

"This is a global financial situation. Currencies are under pressure around the world," Truss said.

She added that she would not retreat on plans to cut taxes, as there was a need to take "decisive action" in the economy. Currently, the UK is strapped with 9.9% inflation, down slightly from 10.1% recorded in July.

Meanwhile, experts have ripped into the new mini-budget, with Noble economist Paul Krugman calling the pound's fall the price the UK is paying for "moronic" economic policy, and top economist Mohamed El-Erian urging the Bank of England to issue a super-sized emergency rate hike or risk of letting inflation soar even further.

Unfunded tax cuts and increased debt could exert more inflationary pressure on the economy when prices are already sky-high, economists say. It could also force the Bank of England to hike rates more aggressively than planned and increase the risk of a recession.

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