Pound resumes slide after BoE and Treasury seek to steady markets

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Sterling resumed its slide back towards historic lows despite efforts by the Bank of England and the Treasury to reassure markets on Monday, as investors expressed alarm about UK public finances.

After the pound hit an all-time low earlier in the day, the Bank of England said it would not hesitate to “change” interest rates if needed to fight off inflation and the Treasury vowed to publish a new plan to tackle debt in November.

The statements followed intense talks between Kwasi Kwarteng and BoE governor Andrew Bailey in the wake of the UK chancellor’s tax cutting, high borrowing fiscal plan presented late last week.

But after the BoE said it would not assess the turbulence in UK financial assets until its next planned meeting in November — dampening the prospects of an emergency rate rise — the pound dropped to under $1.07 from its high of the day of $1.0931.

UK government bonds remained under heavy selling pressure.

The bank said it would not “hesitate to change interest rates as necessary to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit”.

But it damped prospects of an immediate rate rise to shore up the pound, saying that it would make “a full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, and act accordingly”.

In his own attempt to reassure markets he was serious about bringing debt under control, Kwarteng issued a statement bringing forward plans for a new medium-term fiscal strategy to bring debt down as a share of GDP.

It will be published on November 23. Last week Kwarteng told the Financial Times he did not expect to set out his new debt strategy, which will give new details on the government’s fiscal rules, until “the new year”.

The Treasury also set out a calendar of dates to provide markets with more certainty, after the chaos of the last few days. Kwarteng announced that the independent Office for Budget Responsibility would set out a full forecast alongside the fiscal plan on November 23.

The Treasury confirmed it would stick to current government spending plans — which extend beyond the expected 2024 election — and that there would be a Budget in the spring, with a further OBR forecast.

Sterling slumps to record low against the dollar

Traders unwound their bets on an unscheduled shift to higher rates, but stuck by their wagers on an extra-large rise at the central bank’s next meeting. Following the BoE’s announcement, markets were pricing in an increase to 3.75 per cent in November. The bank rate is expected to reach almost 6 per cent by May.

Trading in the pound on Monday was the most turbulent since the depths of the coronavirus crisis in 2020, with the currency recording a greater than 5 per cent swing from its daily high and low point.

Early in the morning the pound lost as much as 4.7 per cent to trade as low as $1.035 against the dollar after Kwarteng vowed at the weekend to stick with his tax-cutting drive.

Sterling’s sharp swings on Monday followed steep falls on Friday, when Kwarteng announced a massive new wave of borrowing to fund £45bn of tax cuts and a package to curb rising energy bills.

“The UK is now in the midst of a currency crisis,” said Vasileios Gkionakis, Citigroup’s Emea head of foreign exchange strategy.

UK government debt dropped further on Monday following Friday’s bruising sell-off, the worst day for the gilt market since the early 1990s.

Two-year gilt yield from 2008 to 2022

The 10-year gilt dropped sharply in price, pushing yields up by a sizeable 0.42 percentage points to 4.2 per cent, up from about 3.5 per cent before Friday’s fiscal announcement. Two-year yields, which are particularly sensitive to BoE expectations, have surged to 4.5 per cent, from 3 per cent at the end of August.

Underpinning the pressures on sterling, the OECD downgraded its forecasts for the UK on Monday. According to its latest projections, based on research carried out before the tax cuts announcement, the British economy will grow by 3.4 per cent this year and not at all in 2023.

Mel Stride, Tory chair of the Treasury select committee, criticised the chancellor for signalling more tax cuts. “It would be wise to take stock of how through time the markets weigh up recent economic announcements rather than immediately signalling more of the same in the near term,” he said.

Unlike big tax cuts in the 1980s, Kwarteng is borrowing tens of billions of pounds to fund his plans, adding to demand at a time the BoE is raising rates to bring inflation under control.

“It looks like we’re headed for a spiral that we usually see in emerging markets crises, where policymakers struggle to reassert credibility,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore. He highlighted that the country was still running a “gaping current account deficit”.

“If we continue to see these huge moves in the market, the Bank of England will have to raise interest rates, perhaps as much as 1 percentage point, to try and stabilise the pound,” he added.

The BoE raised interest rates by 0.5 percentage points on Thursday, after a third successive 0.75 percentage point rate increase by the US Federal Reserve a day earlier.

Reporting by Tommy Stubbington and Chris Giles in London, George Parker and Jim Pickard in Liverpool, and Stephanie Findlay and Hudson Lockett in Hong Kong. Additional reporting by Adam Samson in New York and Leo Lewis in Tokyo

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