Last week’s UK mini-budget proved to be another knock for sterling, with the currency down more than 5% against the dollar and around 3% against the euro since the fiscal statement was announced.

Newly minted chancellor of the exchequer Kwasi Kwarteng hasn’t been swayed from his tax-cutting path by the drop in the pound to an all-time low against the dollar.

In fact, he said in an interview at the weekend that there is “more to come.”

As well as the sell-off in sterling, the mini-budget last week has seen a huge move in UK bonds, with the yield on the 10-year instrument rising by a full percentage point from 3.5% to 4.5% in the wake of the tax cut announcement.

So far the Bank of England has done little to calm nerves, with a statement on Monday saying that the central bank is “monitoring developments in financial markets.”

Taken in isolation, the financial market moves do seem manageable so far. However, the backdrop for the UK economy at the moment means that Kwarteng’s tactic of cutting taxes and increasing borrowing is a high-risk move.

Inflation

Inflation in the UK is close to 10% and the Bank of England is expected to increase the pace of rate hikes in the coming months to help control that. This will lead to a further increase in borrowing costs for the UK, hitting the country’s ability to borrow money just when the treasury intends to increase bond issuance.

The pressure markets put on the UK’s borrowing costs proved too much by Wednesday morning. The bank announced it would buy more bonds in order to help “restore orderly market conditions”.

Markets clearly view the chancellor’s cut-taxes-to-spur-growth fiscal measures as extremely high risk. However, the intervention from the central bank has helped reduce fears of a disorderly sell-off in the short term. There is always the chance that the effects of the mini-budget might turn out to be not as bad as feared.

Euro rate

Closer to home, the move to around 90p to the euro is probably manageable for Ireland’s agri-food businesses as that level is not far from the currency’s average value since 2016’s Brexit vote. However, another leg lower in sterling would likely start to have more severe economic effects.

According to figures from Bord Bia, the UK market accounts for 33% of Ireland’s food and drinks exports, with companies here selling €4.4bn to the country in 2021.

With those exporters working with already tight margins due to increasing input costs, any price pressure from UK customers will be very unwelcome.

While it is probably too early for that to feed through to suppliers with most contracts agreed well in advance, the direction of travel in sterling is definitely a cause for concern.