The Bank of England said it would not hesitate to change interest rates and was watching markets “very closely” after the pound plunged to a record low and UK bond prices collapsed in response to the new government’s financial plans.
Finance Minister Kwasi Kwarteng sent the pound and government bonds into a tailspin on Friday with a so-called mini-budget designed to grow the economy by funding tax cuts with huge increases public loans.
Such was the market turmoil on Monday, there was growing speculation in financial markets that the BoE would make an emergency interest rate hike after raising rates last week to 2.25% vs. 1.75%.
Instead, with the fragile pound and bond prices still plummeting, Kwarteng released a statement just before the UK stock market closed to say he would set out medium-term debt reduction plans on the 23rd. November, alongside the Independent Office for Fiscal Responsibility’s forecast of the total extent of government borrowing.
The central bank on Monday hailed Kwarteng’s “commitment to sustainable economic growth” and the independent scrutiny that the OBR’s growth and borrowing forecasts would bring.
“The bank is monitoring financial market developments very closely in light of the significant revaluation of financial assets,” said Bank of England Governor Andrew Bailey.
“The MPC will not shy away from changing interest rates as much as needed to bring inflation back sustainably to the 2% target over the medium term, in line with its mandate.”
Raphael Bostic, head of the US Federal Reserve, said the market moves could lead to greater economic tension in Europe and the US, while analysts and investors said the government had done the bare minimum to reassure the markets.
“There seems no reason to believe markets will give the government the benefit of the doubt ahead of a new Kwasi Kwarteng fiscal plan,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
“The market could force their hand and there could still be an emergency rate hike before the next BoE meeting,” he said, referring to the next policy announcement scheduled for Nov. 3.
hustle day
The Treasury and central bank statements came towards the end of a day of turmoil for Britain’s currency and debt.
As the pound dipped as much as 5% against the dollar to hit $1.0327, its all-time low, in Asian trading, it pared most of the day’s losses in European trading in hopes of a an emergency rate hike.
The statement at the close of trading on Monday took the pound down to $1.0645 from $1.0820. The pound was trading at $1.0680 at 4:44 p.m. GMT, down 1.6% on the day.
In the market for British government bonds, or gilts, the pressure had been even more intense, with prices of five-year bonds registering their biggest daily decline since at least 1991, matching the historic fall on Friday.
The yield on the five-year gilt – the UK government’s cost of new five-year borrowing – hit its highest level since September 2008 at 4.603%, and rose a full percentage point in the past two trading days. stock market as Prime Minister Liz Truss’ government lost credibility with investors.
“The reaction to the proposed plan is of real concern and fear that the new actions will add uncertainty to the economy,” Atlanta Fed President Bostic told The Washington Post.
“The key question will be what it means to ultimately weaken the European economy, which is an important consideration for the performance of the US economy.”
With markets remaining extremely volatile, UK lenders Halifax, Virgin Money and Skipton Building Society pulled mortgage products from the market.
Mohamed El-Erian, chief economic adviser at Allianz, had previously said the central bank would have no choice but to raise interest rates if Truss and Kwarteng did not back down.
“And not by little, 100 basis points, a full percentage point to try to stabilize the situation,” he told BBC Radio.
Truss, Britain’s former foreign secretary, was elected prime minister earlier this month by a vote of 170,000 Conservative Party members – not the wider electorate – after an internal party rebellion that ousted Boris Johnson from power.
She handily beat her rivals to the top job by promising to spur economic growth through tax cuts and deregulation to end the largely stagnant real wage growth that marked her party’s 12 years in government.
His pledge to end so-called “Treasury orthodoxy” and aim for growth marked a sea change in British financial policy, reminiscent of the Thatcherite and Reaganomics doctrines of the 1980s.
“Markets go up and down,” a senior Conservative Party source said Monday, speaking on condition of anonymity. “We did something structural, short-term, that will have long-term seismic and positive benefits.”
Further underscoring how investors have punished UK assets, the difference in 10-year borrowing costs for the UK and German governments has exploded to its highest level since 1992 when Britain withdrew from the scheme. European exchange rate.
UK 10-year government bond prices are now on course for their biggest fall in a calendar month since at least 1957, according to a Reuters analysis of data from Refinitiv and the BoE.
