>> you're watching al jazeera. the headlines this hour. referendums in occupied areas of ukraine have ended, with pro-russian separatists declaring victory. they claim most people border to join russia, and keep allies say the road is a sham. the u.n. security council discussed the referendums in ukraine. the political affairs chief says the paternal legitimacy in international law. ukrainian president said the world must take action against

moscow. a senior russian official has issued the biggest nuclear threat so far in the war. dmitry medvedev says russia will not hesitate to attack ukraine with nuclear weapons. the danish energy minister suspects that blasts were the cause of catholics in two major problems between russia and europe. denmark and sweden first reported the leaks in the nord stream 1 and nord stream 2 pipeline's, near the island of bornholm on thursday. hurricane ian is intensifying as it moves towards the u.s.. 2.5 million people are under evacuation orders in florida. the category 4 storm is expected to make landfall on wednesday. it has already bettered parts of the caribbean, including cuba. >> when you look at storm surge of this nature, that is a very life-threatening hazard, you're talking about 10 or 12 feet of storm surge, which you could see in certain parts of this when you it makes landfall. it will also produce massive

amount of rain and it is good to produce major, major flooding. >> there has been violence between security forces demonstrators in dozens of iranian cities as protests continue over the death of a 22-year-old woman in custody. mahsa amini died after being detained by iran's so-called morality police" for not wearing a hijab. a saudi king ordered the cabinet reshuffle. mohammad bin salman's other son is the new defense minister. all right, that does it for your headlines on al jazeera. stay with us is "inside story" on al jazeera. stay tuned. ♪

hazem: the british pound crashes to an all-time low against the u.s. dollar. it follows the u.k. government drastic tax cut moved to fight inflation. what is the fallout on an already struggling economy within the u.k. and outside? this is "inside story." ♪ hello and welcome to the program. the british pound is struggling to hold value against the u.s. dollar, after hitting an all-time low. it recovered slightly on monday after plunging 5%. the fall is raising concerns about the world's sixth biggest economy, and its appeal to international investors. on friday the british government

unveiled major tax are concernee amount. that has led to days of volatility in the value of sterling, and undermined its status as a reserve currency. our correspondent has more from london. guest: after an anxious start, the pound seems to be clawing back some of its losses and its steady, somewhat, but people are understandably very nervous, and placing much of the blame on chancellor kwasi kwarteng, asking what is the plan to balance the books after the largest tax cuts in 50 years. the chancellor will be meeting with bankers on tuesday in talks which will probably evolve into a form of crisis meetings. that is because interest-rate predictions are already rising. britain is looking at an interest rate of 5.8% this time next year, a huge hike on last week's prediction of just 4.5%. as a result, we are seeing some mortgage lenders pause or pull

their products from the market, worried that they will not be able to meet their margins, or that people will not be able to make repayments. that will be a huge blow for people trying to get on the property market, or who needed to remortgage their properties, all at a time and the cost of living in this country is increasing at its fastest rate in 40 years. businesses and markets are looking to the bank of england for some decisive action, it will have to wait until their next meeting on november 3. the government, however, says it plans to publish its median fiscal policy for next year to november 23. that is still nine trading weeks away. what is needed right now is confidence and stability. and for that, the markets need to see a macroeconomic plan that they believe in. hazem: the opposition party wasted no time getting its verdict. neighbors shadow chancellor accused the government of gambling, and said the british taxpayer will pay the price.

>> sterling is down. that means higher prices as the cost of imports rise. the cost of government borrowing is up. that means more taxpayers money will go into paying the interest on our government debt. and in turn, that means the cost of borrowing for working people will now go up too. hazem: how will it filing pound affect the world. u.k. imports more than half its food, so the cost of everything from apples to coffee will go up. the raised movie especially notable in goods traded in u.s. dollars, like oil and gas. lower-income families will be the hardest hit, their earnings having to stretch even further. and with winter approaching, heating costs are another concern. britain's money also will not go as far if they travel to the u.s., or two countries using the dollar. but for tourists, the drop in the pound means it will be

cheaper to visit the u.k. >> the situation look like it is just getting worse and worse and worse. >>. >> the poor that are on lower incomes, they are struggling. they are struggling with heating and other bills. why would they be cutting it for the people in higher income brackets? it is ridiculous. london is getting worse. england is getting worse, to be honest. >> you could argue that it is a good strategy to attract businesses and establishments to london, so to that extent perhaps there is a good decision. on the other hand, it will reduce the overall, say for instance, the money that can be allocated to benefits. >> housing will be a challenge. but yes, good to have a mini budget, i just wish that during this time of national crisis, we are spending a bit more on those in need. >> what does that mean for me now? i was just at covent garden and walking along the shops and

deliberately not going in some places. maybe i will go back. >> that is a big plus. it's a big difference when you get more bang for your back. that makes people want to travel. >> of course, money and purchasing things, it's a good time to do it because we are not earning, you know, pounds. ♪ hazem: let's bring in our guests now. in london, we have vicky pryce, chief academic advisor at the center for economics and business research. in dublin, byron lucy, professor of international finance and commodities at trinity business school. and also in london, jonathan lis, journalist and political commentator. good to have you over with us. vicky pryce, it is being called tutrussonomics, these tax cuts named after the prime minister. clearly they have not gone well

in the markets. why is that? guest: the main problem is that the chancellor, who is newly appointed of course by liz truss, the new publisher, announced a mini budget, which wasn't very mini at all, but actually introduced tax cuts to the tune of 45 billion pounds, which is the biggest size of tax cuts we have seen since 1972. it made people worry about the inflationary impact of this, but also, how that injection into the economy, if you like, would be funded. what happened as a result, not only did sterling suffer because there were concerns that the inflationary element would be quite significant of those new measures, but also, of course, bond markets reacted negatively. we have seen yields rise. the interest rates that people want to have if they are prepared to lend to the u.k. government, they have risen to over 4%.

that is huge, because if you remember just a year ago, yields on the 10 year government bond were below 1%. now we are above 4%. that is a very substantial increase in interest rates which will be felt throughout the economy, because it loads and loads of long-term rates are based on both yields -- based on those yields. hazem: why is it affecting the pound so much, why has the pound falling so precipitously in the last few days? guest: the one reason, of course, is inflation looks higher. remember, we had a bunch of mini budgets which not only injected extra money into the economy, but also gave the amount of money that would be needed for an electricity price freeze, introduced also by the new government, but of course, we hadn't heard some of the new teachers. that electricity price freeze itself should be bringing prices down significantly, by 4%. the bank of england was right to

raise interest rates by just 50 basis points the day before that, september 22. the markets did not like it very much because everyone else has been raising interest rates by 75 basis points. nevertheless, i think it makes sense because the inflationary projections that were being made where those. now you have the worry of the unfunded budget and all the money that will be coming into the economy, fueling inflation. what the markets decided was actually, that interest rate increase was not efficient because now, you have once again struck and increased in inflationary expectations because of that. there wasn't enough support to keep the currency up and that is why the plunge of the pound. hazem: brian, what does this mean for the companies that do business with the u.k., and for others that want to invest their the future? guest: i think if you were a company that was selling into

the u.k., you have got a problem with depreciation, in the sense that it makes stuff more expensive for people in the u.k. . but the nature of the tax cuts is incredibly skewed, and it really is the case that this is wonderful if you are selling caviar, high-quality leather goods, or higher forms of consumption for the very rich. the vast majority of people in the u.k. are not going to see any benefit from these tax cuts, except in terms of inflation. so overall, i would say this makes for the u.k. a less attractive place to do business. the big problem is the particular issues, governments play around with tax cuts in interest rate changes happen all the time. difficulty is that there seems to be a degree of incoherence, even bordering on incompetence, around what is going on. that doesn't foster any degree of credibility. the last six or seven years, the

u.k. has been looking like an increasingly, economically-incoherent outfit, starting from brexit and then through negotiations which resulted in about the hardest brexit of the wto shark, which is still something that is desired by the intellectuals, as it were, behind the tory party. through now, a series of events which have, you know, undercut the bank of england's inflation-fighting efforts. we know from experience in the 1970's and early 1980's, that long-term, inflation is very destructive of a country's well-being. so it is kind of strange that you have got a chancellor who has a phd which was on the u.k. 's sterling crisis in the 17th century, who has found himself, in his first actions, arguably precipitating a sterling crisis.

it has to be remembered that most of the u.k. government might think sterling is not really the world's reserve currency, that is the dollar, and while it is highly desired and highly demanded and held as a reserve asset, liquid reserves by the bank of england, should they be desirous of intervening directly in foreign exchange markets. , are very limited. the "financial times. " estimates there are actually 100 billion dollars, which is really a drop in the ocean when you consider how much sterling is traded. so it is not the individual element, it is the death of 1000 cuts, of the meat of good economic competence that i think in the long run will be the problem here. hazem: jonathan lis, this is being seen as a huge political gamble for the new british prime minister. whenever a new leader comes into the job, their political capital is normally at the highest.

has liz truss put down her chips on this? guest: liz truss has a stick to the entire house on this political gamble, and by any measure, she has lost. hazem: is it not too early to say that? guest: well, it wasn't in liz truss's plan to crash the pound, i presume, it was not in liz truss's learn to have an emergency statement by the bank of england suggesting that they might have to raise interest rates before the next scheduled meeting at the monetary policy committee. and i don't think it could have been in her plans to see soaring interest rates, which are going to see mortgage rates increase by 700 pounds -- several hundred pounds for homeowners with mortgages. not forget one of the bases of the tory party, their voter base are actually the demographic which turned much of the north

and the midlands for the conservative party in 2019. so this is a political as well as an economic disaster, and i suppose that investors are a bit like predators in horror films, they can sense panic. they can see when people don't exactly know what they're doing. and at the moment, both government and the bank of england are at the position of extreme weakness, but not least because they are pulling the levers in different directions. the government is trying to accelerate the economy, whereas the back of -- where the bank of england is trying to put the brakes on it and trying to raise interest rates. as a result, they are taking the sterling out with them. hazem: let's talk more about the clash between the bank of england and the government in, their priorities. the bank of england like many countries in the world, enjoys a certain level of independence. they can set the interest rates. with this growth-focused goal of

liz truss, is it fundamentally at odds with the inflation-fighting mission of the bank of england? guest: i would agree that there is a bit of a schizophrenic existence right now between the government and the bank of england. the bank of england is indeed independent, although there have been some hints during their campaigns for deciding the new tory leader, that liz truss was questioning the independence of the central bank, or at least some aspects of it. now, that independence is very important, and of course, the remake that is given to them by the government, by the chancellor, is to keep inflation at 2% target if they can. now, of course, the target has been hugely exceeded in reality. we have 10% inflation or thereabouts. but it is not dissimilar to what is happening in the u.s. and in quite a lot of other countries, including the continental europe

overall. so the ecb is also having this particular problem. in fact, if you look at countries in europe, particularly those bordering russia, we have inflation of over 20% for quite a few months now so there is no doubt that we have got a problem. if whatever you are trying to do on the physical front is negated by what happens on the financial front. and the way in which the government has gone about trying to get more growth inevitably lead to this reaction in terms of interest rates, not just what the bank of england was, but more importantly, what is happening in the bond markets. interest rates going up is, as jonathan was suggesting, pretty dreadful for a number of individuals, a very large number of households, and also would be pretty bad for business, which have just been happy to have a bit of relief on the energy front. even though it is short-term, we will see what happens next. and are now being hit by this.

it's not surprising that all the data we have in terms of consumer confidence and business confidence, has tended to move downwards. what has been happening the last few days will move it downwards even further. how it will be result, of course, is a question mark. but i have to say, this is not the only country where it is happening, but it is being shown in a more vivid form because of this mini budget, which was unexpected in its size, and with the markets indeed believe is unfunded and is causing loads of problems for the economy. hazem: brian lucy, what is your take on this conflict between the government and the bank of england and their mixed priorities? guest: it is not mixed priorities, these are important priorities. the only way in which this can work is if the economy grows through these massive tax cuts. this is reaganomics circa 1992,

with the trickle-down economics. this is voodoo economics, as george bush famously once called it, before proceeding to keep implementing it. one thing reaganomics did was to absolutely balloon the u.s.'s national debt. and doing the same now for a medium-sized economy facing significant problems already, is , as was said, letting the fox into the children's houses. logical end game here for they could government is to reduce the independent self vacuum. that is a logical endgame. you could see the story where they say, the bank of england are shackling our ability to grow the economy through aggressive tax cuts and restructuring, therefore, we must reduce our independence because interest rates rising bad thing, in this context.

that is politically sensible and coherent, but it ends up in an economically bad place. i think the uk is in danger of that, because what we have not seen for the last several years is democratic, sensible decisions. they seem like frenzied, ideological decisions dragging academic outcomes. there is no evidence that the appetite for ideological-based economics is being done in anyway. it has become the sharper focus with the election by people, very representative of the u.k. population, of extremely right-wing, economically right-wing government. hazem: jonathan lis, how do the conservative government recover from this politically, from the political fallout from this question mark because the optics from this on the surface certainly don't appear to be good. these tax cuts that mostly the richest people will benefit

from, in the middle of a cost-of-living crisis and energy crisis and so on. guest: i think you have hit the nail on the head there, that they have sabotaged themselves politically. i think the bigger point is -- i suppose the bigger point is that this wasn't an economic measure, it wasn't an economic mini budget, this was a political act motivated by politics more than economics, which is why economists are condemning it and markets were voting with their feet. because it made no sense economically. liz truss says that her overriding ambition is to promote growth. although the moves that she and her chancellor have made are not going to promote growth. some of the headline bills, such as to remove the 45 pence additional rate of tax on the most wealthy people in society, and to lift that you cap on

bankers' bonuses, which was introduced after the financial crash, are not going to promote growth at all. evidence suggests that those measures were not really affect growth either way. that they are political measures to chime with the hard right, conservative ideology, which favors the rich, particularly in the eyes of the conservative-thinking. the conservatives are working into that cliche, favors the rich, of the rich, and allows the rich to benefit mostly from tax cuts, leaving the poorest with almost no benefits whatsoever. so that is the kind of policy platform that liz truss has now firmly planted on the british electoral terrain. i don't see why she has done something so deliberately, how she can reverse it. no one forced her into that position. she has chosen that of her own volition entirely. and so, i don't see how she suddenly decides to reverse that. and more to the point, i don't

think she wants to reverse that. that really is a gift to the labour party because they can show that conservatives really are a thatcherite party in times when thatcherism is not a cure for any condition. if the labour party just talks about bankers' nurses and tax cuts for the rich, they can walk through the next election without too many problems. liz truss's party may decide to get rid of her before the next election. hazem: is there anyway to recover from this? i mean, if the financial markets stabilize over the next few days and the pound, at least, stops falling though it has, what do you think could happen further down the road? guest: well, it is interesting. what room for maneuver is there? quite a lot of the in markets we have seen, the rising yields and concerns about the debt and the expectations may be

that the bank of england would do an emergency interest rate hike, which they said would wait until november, has also been caused the fact that the chancellor announced that there would be more tax cuts to come. i think that is what sent the pound falling even faster. but of course, you are right, it has sort of recovered. i think they are hoping that maybe the markets will forget about this for a while. but we can't get away from the fact that the pound has fallen significantly this year, down between 20% and 30% since january one revised expectations about the growth prospects for the economy. we are at the bottom, if you like, of the g7 leak in terms of growth. the focus of the o.e.c.d., which looks at various countries in europe which may be in recession next year. those are germany, italy, and the u.k.. a bit earlier, it was almost 20

the u.k., but now, because of gas concerns and rationing, we have seen other countries added as well. hazem: alright, will have to leave it there. thanks to all of you, vicky pryce, brian lucy and jonathan lis. and thanks to you all for watching. member, you can see this program again any time, just go to our website, aljazeera.com. and for further discussion, go to our facebook page. that's facebook.com/ajinsidestory. you can also join the conversation on twitter. error handling there is @ajinsidestory. for me and the whole team here bye for now. ,♪ x■?qoñé>z■z■z■

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