The pound tumbled to a record low on Monday, extending heavy losses on government bonds, fueling hopes of a Bank of England statement or an emergency rise in UK interest rates after Prime Minister Kwasi Kwarten’s string of tax cuts last week.
After Prime Minister Kwarten vowed to continue cutting taxes over the weekend and warned the UK was in a currency crisis, the currency traded early in the morning to $1.035, down 4.7%, before stabilizing just below $1.08. did. .
Neither the Bank of England nor the Treasury denied rumors that the Bank of England would issue a statement on Monday in response to currency weakness.
In early autumn, the pound fell to its lowest level ever. It sharpened criticism of Friday’s fiscal statement when the prime minister announced a massive new wave of borrowing to finance a £45bn tax cut and package to curb rising energy prices.
“The UK is currently in the midst of a currency crisis,” said Basileios Gicionakis, head of foreign exchange strategy at Citigroup Emea.
Traders increased bets on emergencies interest rate Rise to stabilize the pound by the next meeting of the Bank of England in November. increase. Interest rates are expected to reach 6% by May from 2.25% currently.
The central bank declined to comment on whether it is planning an emergency interest rate meeting this week.
UK government debt fell further on Monday following a heavy sell-off on Friday, the worst day for the gold leaf market since the early 1990s, reflecting a sharp shift in interest rate expectations.
10-year gold coins fell in price, with yields rising a whopping 0.30 points to 4.13% from about 3.5% before Friday’s financial announcement.
Supporting pressure on the pound, the OECD lowered its forecast for the UK on Monday. According to the latest forecasts, the UK economy will grow 3.4% this year and not grow at all in 2023, based on research conducted before the tax cuts were announced.
The Treasury Department did not comment on market movements on Monday. In an interview with the Financial Times last week, Mr. Kwarteng said: The market is always in motion. It is very important to keep your cool and focus on your long-term strategy. “
However, Mel Stride, chairman of the Maryland Department of Treasury Special Committee, criticized the prime minister for suggesting further tax cuts.
“One thing is for sure, it would be wiser to take the time to consider how the market will interpret the recent economic announcements rather than have them come out soon,” he said. he said.
Gerald Lyons, who has advised Prime Minister Liz Truss’ new team on economic policy, said Kwarten needed to do more to explain his approach to markets.
“We need to reaffirm that tax cuts are part of the story and are part of the story,” Lyons said in an interview with Bloomberg Radio. “They are following the supply side agenda.”
He said the British government should not change course and the Bank of England should raise interest rates.
The UK does not have the resources, and perhaps the willingness, to intervene directly in the currency market to support the pound, unlike countries like Japan that intervened last week. However, the BoE’s rate-setting monetary policy committee has met outside of normal cycles, usually when markets try to restore calm by cutting interest rates. Since becoming independent in 1997, the BoE has never raised interest rates between scheduled meetings.
“If I were still at the Bank of England, I would want to announce an additional meeting within a week,” said Sushil Wadwani, an asset manager and former BoE policymaker.
The Westminster tax cut comes as the UK is already expected to spend £150bn to subsidize energy costs for consumers and businesses. Most of this borrowing is to be financed by Gilt.
Kwarten borrows tens of billions of pounds, unlike the big tax cuts of the 1980s fund his planincreasing demand at a time when the BoE is raising interest rates to curb inflation.
“It looks like we’re headed for the spiral we usually see in emerging market crises, where policymakers are struggling to regain confidence,” said Mansur Mohiuddin, chief economist at Bank of Singapore. He stressed that the country still has a “large current account deficit”.
“If such a big move in the market continues, the Bank of England will need to raise interest rates perhaps 1 percentage point to stabilize the pound,” he added.
bank of england interest rate hike After raising interest rates by 0.75 percentage points three times in a row on the previous day, the US Federal Reserve cut them by 0.5 percentage points on Thursday.
But some investors say an unscheduled rate hike could backfire by fueling panic.
“An emergency rate hike to counter the damage of an emergency mini-budget looks ugly and probably won’t be accepted by the market,” said Jim Leavis, head of public bonds at M&G Investments. “People say that if you raise interest rates and the currency depreciates more, you know you’re an emerging market. The BoE probably doesn’t want to test that theory.”
Labour’s shadow prime minister, Rachel Reeves, said rising interest rates were pushing up households’ cost of living.
“The Prime Minister and the Prime Minister are like two gamblers chasing losses in a casino…they are not betting their money, they are betting all our money.” she told BBC Radio 4’s Today programme.
Labor has pledged to undo some of the government’s tax cuts on national insurance, corporate taxes and the abolishment of the 45p tax rate, but will keep the impending basic income tax cut from 20p to 19p.
Additional reporting by Adam Samson Leo Ruiz in New York, Leo Ruiz in Tokyo