After tumbling to a record low against the dollar, the British pound stabilized Tuesday, rising more than 1% to $1.08.
But the economic policy that sparked the currency's historic nosedive yesterday hasn't gone away. And it's especially bad news for anyone who isn't wealthy.
Here's the deal: Millions of homeowners in the United Kingdom are about to see their monthly mortgage payments increase by hundreds or even thousands of dollars, my colleague Anna Cooban writes.
That's because the Bank of England is now widely expected to hike interest rates even further to tackle inflation that will be exacerbated by the government's sweeping tax cuts. Many expect the borrowing rate to hit 6% next year, up from 2.25%.
And unlike in the United States, where mortgages typically hold a fixed rate over 15 or 30 years, British fixed-rate loans have much shorter terms, say, two to five years.
That means many as 1.8 million borrowers are now hurtling toward a financial cliff as they prepare to refinance next year, when the mortgage rate may well have doubled.
Sooooo, let's do a little math here (and by that I of course mean let's ask an economist to do the math.)
Samuel Tombs, chief economist at Pantheon Macroeconomics, calculates that a 6% interest rate on the average two-year fixed-rate mortgage in the UK would push monthly payments up a whopping 73%.
In other words, the average homeowner paying roughly $920 a month would suddenly have to pay nearly $1,600.
Meanwhile, the country's wealthiest households stand to make huge gains. The policy laid out by Prime Minister Liz Truss' administration eliminates caps on bankers' bonuses and gives workers making more than $1 million a year a roughly $58,000 tax cut. The vast majority (nearly two-thirds) of the tax gains go to the wealthiest one-fifth of households, according to one think tank estimate.
Naturally, people are already freaking out. Online searches for "remortgage" more than doubled in the UK on Monday, according to analysis of Google search data by Loan Corp, a mortgage broker.
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Investors are baffled and consumers are terrified ever since the Truss administration announced its sweeping tax-cut plan, which it believes will spur growth and take the edge off a looming recession.
Few economists agree.
Citibank analysts called the decision a "huge, unfunded gamble for the UK economy."
Truss has defended her plan, invoking Reagan-era trickle-down economics that she believes will encourage businesses to invest.
But as my colleague Nicole Goodkind writes, Reagan's tax policies were far from a slam dunk. According to the US Treasury, tax cuts reduced federal revenues by about 9% in the first couple of years. However, Congress eventually decided the sweeping tax cuts were unsustainable and, with Reagan's approval, raised taxes by a lot in 1982. And 1983. And 1984. And again in 1987.
Britain has its own historical lessons to draw on: The last time taxes in Britain were cut this much, there was rampant inflation, a massive jump in debt and eventually an IMF bailout in 1976.
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