Sterling dropped back to $1.06 after reaching $1.08 on Tuesday after the rebuke by the International Monetary Fund, which warned that generous tax cuts and fiscal policies announced by the government on Friday were not appropriate in the current market environment. 

Susannah Streeter, senior investment and markets analyst at investment platform Hargreaves Lansdown, said the “beleaguered pound was in retreat again” after the IMF’s “stinging criticism” that the government’s programme would fuel inequality.

On Friday, chancellor Kwasi Kwarteng announced a series of tax cuts to boost growth, including the reversal of the health and social care levy of 1.25%, a cut in the basic income tax rate to 19% from 20%, scrapping the 45% tax rate, easing stamp duty thresholds, reversing a planned increase in corporation tax to 25% from 19% and introducing ‘investment zones’ for businesses to benefit from tax incentives and lower regulation. 

The market did not react well, with the pound tumbling immediately after the chancellor’s announcement. 

The IMF said on Tuesday: “Given the elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy. Furthermore, the nature of the UK measures will likely increase inequality.” 

The world’s biggest lender said it is closely monitoring the developments in the UK.

The IMF’s move has added to worries that the UK is fast taking on the characteristics of an emerging market economy, and risks ditching its developed country status, according to Streeter. 

She said: “It’s now not only wracked with trade disruptions, an energy crisis and soaring inflation but it’s also being closely monitored by an international body known as the world’s lender of last resort.”

UK gilt yields - the interest paid on government debt - have “retreated marginally” but they are still sky high, with the yield on 10-year gilts hovering around 4.4%, up my more than 340% in a year, said Streeter. 

She added: “Corporate bond yields have shot up even for investment grade companies, considered to be low risk, adding to worries that companies needing to refinance soon or borrow more to cope with rising input costs could struggle to make repayments.”

Commenting on the introduction of investment zones, Modupe Adegbembo, G7 economist at AXA Investment Managers, said this should be helpful in boosting productivity but added: “We are more sceptical about the impact of the tax policies announced and believe they will have a limited impact on trend growth overall.”