Mini-budget triggers sharp fall in the pound

The value of the pound fell sharply against other currencies after the Chancellor, Kwasi Kwarteng, announced his mini-budget on Friday 23 September 2022¹. Lenders withdrew hundreds of mortgage deals from the market over the same period, and the Bank of England bought government bonds in an attempt to stabilise the market¹.

The pound later rose slightly on the morning of 3 October, after the government's U-turn on the removal of the 45p income tax rate, one of the policies announced in the mini-budget. Even so, it remained worth less than two months earlier¹.

The fall threatens to push inflation higher, which stood at 9.9% at the time, because imported goods such as oil cost more in pounds¹. The Bank of England seeks to control inflation by raising the base rate, the rate at which commercial banks pay to borrow money from it. The base rate had recently been increased to 2.25%, with no change scheduled until 3 November¹.

Why it matters for households

Higher interest rates mean higher repayments for borrowers on variable deals, including mortgages, credit cards and personal loans¹. Homeowners due to remortgage are directly exposed: those on tracker or standard variable rate mortgages see their payments move with the base rate, while a fixed deal locks the rate for its term¹. Borrowers who have already received a mortgage offer are not affected by the withdrawals¹.

Holidaymakers were among the first to feel the effects, as the cost of buying meals and hotels abroad increased because pounds buy less foreign currency. Costs already paid, such as flights and hotel bookings, do not change¹.

For pensions, the picture depends on the type. Final salary or defined benefit schemes are most likely covered by the Pension Protection Fund, which pays 90% of what a member would have received, or 100% if already retired, if the pension fund goes bust¹. Defined contribution pots, which have no guaranteed payout, may have fluctuated in value along with stock markets¹. Annuity holders whose provider goes bust are paid 100% by the Financial Services Compensation Scheme¹.

Savers may not see higher rates passed on. Where the rate of inflation is higher than a savings interest rate, money is devalued faster than it grows¹.

What happens next

The Bank of England's next scheduled base rate decision was due on 3 November, and a government "medium-term fiscal plan" was not due until 23 November¹. Which? described the situation as fast-moving and said its coverage was being kept as up to date as possible¹.