The pound continues to fall despite the Bank of England’s emergency measures to calm the market.
Sterling was trading at $1.066 at 2pm, up slightly from $1.057 at midday, as the pound recovers from an all-time low of $1.03 against the dollar as markets spooked react to Kwasi Kwarteng’s mini-budget.
The Bank of England was forced to intervene by announcing that it will buy government bonds to try to calm the markets. The central bank said it wanted to avoid a “material risk to the UK’s financial stability”.
It comes after the International Monetary Fund attacked Liz Truss and Kwasi Kwarteng’s tax cuts for the rich, warning that “large and untargeted tax packages” would “likely increase inequality” in Britain.
In its rare intervention, the IMF took aim at the government after the chancellor’s mini-budget on Friday caused sterling and bonds to fall and gold yields to rise, reflecting the cost of borrowing.
The FTSE 100 index also fell sharply after the open on Wednesday, falling more than 2% at one point, almost 140 points to 6,846.4, and looks set to hit its lowest level since more than a year
The market jitters began after investors were spooked by Kwarteng’s plan to offer tax cuts to the wealthiest while dramatically increasing state spending.
“Given the high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal packages at this time, as it is important that fiscal policy does not operate cross-cuttingly with monetary policy,” a spokesman said of the IMF.
Kwarteng is stepping up efforts to reassure the City about its economic plans amid criticism and the Bank of England signaling a sharp rise in interest rates could be on the way.
The chancellor met with investment banks on Wednesday after days of market turmoil. So far he has insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth.
Responding to the criticism, a spokeswoman for the Treasury said: “We have acted quickly to protect homes and businesses this winter and next, following the unprecedented rise in the price of energy caused by actions il. (Vladimir) Putin’s legal actions in Ukraine.”
Kwasi Kwarteng will try to assure the City Council of his economic plans
(REUTERS)
The government was “focused on growing the economy to raise living standards for everyone” and the chancellor’s statement on 23 November “will set out more detail on the government’s fiscal rules, including ensuring debt falls as part of GDP (gross domestic product) in the medium term”.
Labor leader Sir Keir Starmer said the International Monetary Fund (IMF) rebuke should not be ignored and Kwarteng should change course.
He told LBC Radio: “I think the IMF statement is very serious and shows what a self-inflicted mess the government has made of the economy.
“This was a step they did not have to take. Very often when markets are nervous, when the pound falls, it is because of some international event: conflict in Ukraine, cost of living crisis, energy crisis. This is self-inflicted by the government.”
The Bank of England said it “cannot be indifferent” to recent developments
(REUTERS)
Britain could find itself in “the perfect storm” if the Bank of England continues to raise interest rates, senior Conservative Sir Roger Gale said, warning of a potential economic crash.
“If that [interest rate rise] happens, then we could have the perfect storm,” he told Good Morning Britain. “Sadly I’m old enough to remember the last financial crash when people came into my practice in tears because they lost their homes and businesses.”
Sir Keir, who said his own variable rate mortgage has risen by several hundred pounds, added: “A lot of people with mortgages will be really worried about what’s happening because they know what this means for their budgets – prices are going up.
“We all look at the graph and see that the pound is falling, but it is not an abstract graph. This is reflected in people’s mortgages etc.
“And people are very, very worried this morning.”
Mortgage prices have increased due to the market reaction
(son PA)
Shadow chancellor Rachel Reeves said: “The government urgently needs to set out how it will fix the problems it created with its reckless decisions to waste money on an untargeted cut to the top rate of tax.
“Waiting until November is not an option. The government must urgently review the plans made in its fiscal statement last week.”
Former US Treasury Secretary Larry Summers told Newsnight that Britain was facing a “very ominous” combination of factors.
“I honestly can’t remember a time when a set of policy announcements from a G7 country got such a negative response from both markets and economic experts,” he said.
“The combination that Britain faces is very ominous. I think the kind of warning that the UK has received today from the IMF is the kind of warning that comes much more often to emerging markets with new governments than in a country like the United Kingdom.”
Summers added that the response by the markets and the IMF is the result of a “number of unforced errors” by the UK.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the UK was at risk of losing its status as a developed country.
“Not only is it now being hit by trade disruptions, an energy crisis and rising inflation, but it is also being closely monitored by the international body known as the world’s lender of last resort,” Streeter said.