Bank of England ‘won’t hesitate to change interest rates if necessary’ after pound plunge

The Bank of England said it “will not hesitate to change interest rates if necessary” after markets reacted badly to the Chancellor’s tax cut mini-budget.

In a statement, the Bank said it was “monitoring developments in financial markets very closely in light of the significant revaluation of financial assets.”

It came after the pound fell to a historic low against the dollarsparking speculation in the market that the regulator may be forced to step in and raise interest rates more than previously announced.

The Treasury also tried to calm market fears by indicating when it is due to provide details of its growth plan, but both announcements only sent sterling back to Monday morning lows. After stabilizing at around $1.08 on Monday afternoon, the pound fell rapidly and landed at around $1.06.

Chancellor Kwasi Kwarteng is due to present a “medium-term fiscal plan” to detail the government’s fiscal rules on November 23, the Treasury announced in a statement on Monday afternoon. The body responsible for providing independent economic forecasts and analysis of budgets, the Office for Budget Responsibility (OBR), is to provide its forecast alongside the announcement of the November budget plan, the Treasury added.

The body did not provide analysis and forecasts for last Friday’s mini-budget because it was not a traditional budget.

A provisional budget for the OBR will also take place in the spring, the Treasury announced. In the meantime, he added, ministers will announce new measures, aimed at boosting growth, in October and early November.

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Earlier on Monday, the pound slid almost 5% to $1.0327 – building on fresh 1985 lows seen on Friday after Kwarteng released the the largest program of tax reductions for 50 years.

The £45billion tax cut package saw the market deliver a verdict on the sustainability of public finances, given the additional demands it will place on government borrowing. There are fears that the tax cuts will fuel inflation, which the Bank of England has pledged to keep in check.

Bond markets also continued to reflect the crisis of confidence, with rates demanded in exchange for investors’ cash reaching levels not seen since 2008.

The pound plunged below its all-time low against the dollar – set in February 1985 – of $1.054 early Monday in Asian trading, fueling fears that parity could be possible in the future. A weak pound will make it more expensive to import dollar goods, which transmitted to consumers.

The currency then stabilized at around $1.08 – still down from where it was early Friday morning before the mini-budget.

The government’s growth plan was clearly the catalyst for Friday’s fall. Still, traders said it has since intensified attention more broadly as the dollar also climbed against a basket of other international currencies.

The euro has fallen to new 20-year lows against the dollar amid growing fears of recession linked to the war in Ukraine and following the elections in Italy which will see a far-right leader become the country’s new prime minister.

The problem, both for the UK and for Europe in general, is that weak currencies raise the price of goods in dollars, which increases import costs and further fuels inflation.

The UK is also facing rising prices for goods from the mainland as the value of the pound has also fallen sharply against the euro, standing at €1.0948, down 10 cents since august.

“We are facing a national emergency”

Rising government borrowing costs saw the yield on the benchmark 10-year gilt rise to almost 4.1%, the highest since April 2010.

Analysis of Bank of England and Refinitiv data by Reuters news agency suggested the yield was on course for its biggest single-month rise since 1957.

Shorter term bonds were at levels not seen since the financial crisis.

Shadow Chancellor Rachel Reeves said at the Labor Party Conference“We are facing a national emergency.

“Energy prices are going up, the cost of weekly groceries is going up, people’s wages are not keeping up.

“On Friday, the Chancellor had the opportunity to offer a serious response to the cost of living crisis. And he failed.”

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The Prime Minister’s spokesman reiterated the Government’s line that he would not comment on market movements or interest rates, adding that it was important that the independence of the Bank of England remained.

Mr Kwarteng suggested his announcements were just the start of the government’s program to revive the UK’s stagnant economy.

“We’ve only been here 19 days. I want to see, over the next year, people keep more of their income because I believe the Brits are going to lead this economy,” he said. he told the BBC Sunday With Laura Program Küenssberg.

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Chancellor challenges ‘long-term growth plan’

Mr Kwarteng is reportedly considering scrapping a charge for parents earning over £50,000 and claiming Child Benefit, increasing annual allowances on pension pots and tax relief for people who stay at home for themselves caring for children or relatives.

If the pound fell to parity with the US dollar, it could spark a rebellion among Tory backbenchers who could refuse to vote for the government’s money bill or submit letters of no confidence, the report reported. Daily Telegraph, citing supporters and critics of the Prime Minister.

Asked if he was nervous about the falling pound, falling stock markets and rising cost of government borrowing, Mr Kwarteng said: ‘We have to have a lot of approach. more forward thinking about growth and that’s what my statement on Friday was about.

“I think if we can get some of the reforms…if we get the business back on our feet, we can get this country moving and we can grow our economy, and that’s what I’m 100 per cent focused on.”

He declined to comment on market movements, saying, “I focused on the long term and medium term, and I think it was absolutely necessary for us to have a long-term growth plan.”

Sky News

(c) Sky News 2022: Bank of England ‘won’t hesitate to change interest rates if needed’ after pound plunge

Leslie M. Gill