How does the fall in the pound affect my money? - Times Money Mentor (2024)

The pound took another tumble on Friday morning as the search for Britain’s third Prime Minister in a year got underway.

Markets panicked after now caretaker Prime Minister Liz Truss dramatically resigned on Thursday – a move that sent sterling falling by 1.16% to 1.110 against the US dollar on Friday morning.

The pound was also down 0.64% at 1.14 against the euro.

It comes after September’s mini-budget triggered an all time low in the pound against the dollar, as former chancellor Kwasi Kwarteng unveiled £45 billion worth of unplanned tax cuts. Almost all of these policies have now been reversed.

What does a falling pound mean for my spending?

To put it bluntly, if the pound is worth less, the cost of buying goods from overseas goes up.

This affects commodities such as oil and gas as well as everyday products such as imported produce. UK products can also go up in price if the parts we buy to manufacture them come from overseas. Combined, this piles further pressure on the cost of living and in turn can heighten inflation.

Technology goods, like iPhones, that are made abroad, for instance, may get more expensive in UK shops.

In September, Apple raised the launch price of its new iPhone range in Britain by up to £150, thanks in part to a weak pound. The latest iPhone 14 Pro has a starting price of £1,099. That is a 16% jump from £949 for its iPhone 13 Pro, its main launch last year.

How is the pound performing against other currencies?

Sterling fell by 1.16% to 1.110 against the US dollar on 21 October, the latest significant fall we’ve seen in recent weeks. The pound was also down 0.64% at 1.14 against the euro.

The biggest fall on record was in September 2022, when sterling tumbled almost 5% to as low as $1.0327, taking it below its 1985 low to the weakestsince decimalisation in 1971. It came in response to the mini-budget.

On that day, the pound also fell against every single other currency in the world, from theAlbanian lek to the Japanese yen.

The euro also hit a fresh 20-year low amid further recession and energy supply fears.

Read more: How do interest rates affect inflation?

How does a weak pound affect interest rates?

The Bank of England raised interest rates to 2.25% in September and is expected to raise it by another percentage point on 3 November, when the policy committee are next due to vote on rates.

A falling pound is a particular concern for the Bank of England as it is pushing up rates to cool inflation. Energy is fuelling inflation and the currency for buying this is in dollars. The lower the pound, the more interest rates have to rise.

How could it affect mortgages?

A weak pound piles pressure on the costs of goods, which can in turn, push up inflation.

When inflation rises, interest rates rise, and when that happens, millions of people on tracker mortgages see their monthly payments rise almost instantly.

Buyers and those remortgaging face higher prices too as the fixed-rate products on the market also start to climb.

Earlier this month, some mortgage lenders temporarily withdrew their products from the market due to uncertainty around borrowing. Many of them returned around 2% higher than the week before.

To put that into perspective, the average price of a two-year fix in July was 4.55%. Today,it’s 6.55%. That’s an extra £299 a month on a 25-year £250,000 home loan.

That was all because a five-year British government bond yield — a major benchmark for lenders’ mortgage funding — soared by 96 basis points in the days after the mini-budget. It marked the biggest increase in borrowing costs since records from analyst group Refinitiv began in 1987.

While U-turns in the mini-budget have put an end to panic rises in interest rates, the cost of living crisis continues to affect homeowners.

Experts have already warned that as many as one in five mortgaged buyers could fail to meet affordability checks when they come to remortgage due to rises in living costs.

Further rate rises could push more people out of the affordability bracket – even if they qualify for both a mortgage and further stamp duty relief.

And for those already on the ladder – raising interest rates again would send monthly bills rising for two million homeowners on tracker products, almost instantly.

What does the weak pound mean for holiday money?

If you’re a British holidaymaker, a falling pound means your money is now worth less abroad – in other words you’ll get less euros and dollars for every pound you swap.

In a silver lining, it could be good for tourism. A weaker pound makes our country look far more alluring to foreign tourists, benefiting the British tourism industry.

If you’re heading abroad, specialist currency providers can offer more competitive rates, with lower or no transaction fees as can prepaid cards which reduce your costs abroad.

What does it mean for pensions?

British bonds – also known as “gilts” – have been heavily sold off in recent weeks. Bonds are often sold when the market is worried about the government’s ability to pay off its debt.

When bond prices fall, the debt is considered riskier, and their yields climb.

A fall in the value of bonds could hurt savers approaching retirement, especially investors who are caught in a process called “lifestyling”. This is when people approaching retirement are automatically shifted from stocks into long-dated government bonds. Many investors who have switched to this strategy by default could see the value of their pot decline.

For those not approaching retirement, pensions are a long-term investment so you shouldn’t panic about any short term market shocks.

You can avoid any damage by investing in a portfolio that’s welldiversifiedin terms of country and sector.

If you are already retired, a falling pound can push up inflation and therefore eat into your income so you may need to be more careful with your spending.

One other group that will need to monitor the situation carefully is pensioners living abroad. A falling pound means your UK pension income will be worth less when transferred into dollars. Again, this could affect your spending power.

Read more: Everything announced in the mini-budget and how it affects you

How does the weak pound affect investments?

A weak pound can be damaging for UK importers and manufacturers with supply chains overseas. This is because the purchasing power of their pounds is reduced.

For example, as oil is priced in dollars a weak pound can make petrol more expensive. Gas is also priced in dollars.

Because the UK imports more than it exports, this can therefore push up inflation.

What about petrol prices?

We buy fuel in dollars, so when the pound is low, we get less fuel for our money – although most retailers buy in advance so any knock on effects can take weeks to months to show up.

According to the AA, drivers are already paying an extra £5 for a full tank of petrol because of the weak pound.

The difference in pump prices is adding around £4.95 to the cost of filling up a typical 55-litre family car, the AA found.