Bank of England eyes market turmoil, “will not hesitate” to act

LONDON, Sept 26 (Reuters) – The Bank of England said on Monday it would not hesitate to change interest rates and was watching markets “very closely” after the pound fell to record lows and UK bond prices in response Financial plans had collapsed on the new government.

Finance Minister Kwasi Kwarteng on Friday sent sterling and government bonds into freefall with a so-called mini-budget designed to boost the economy by funding tax cuts with a huge increase in government debt.

With the pound fragile and bond prices still falling on Monday, after UK stock markets closed, Kwarteng released a statement saying he would present his medium-term financial plans on November 23, along with growth and borrowing forecasts from the Office for Budget Responsibility , a government watchdog.

The central bank hailed Kwarteng’s “commitment to sustained economic growth” and the independent scrutiny that would entail the OBR growth and borrowing projections.

“The Bank is closely monitoring developments in financial markets given the significant repricing of financial assets,” said Andrew Bailey, Governor of the Bank of England.

“The MPC will not hesitate to change interest rates as needed to bring inflation back to the 2% target on a sustainable basis over the medium term, in line with its mandate.”

The statements from the Treasury and Central Bank came at the end of a turbulent day for Britain’s currency and debt.

While the pound fell as much as 5% against the dollar in Asian trading to $1.0327, its weakest on record, it had erased most of the day’s losses in European trading on hopes of an emergency rate hike. , Continue reading

Monday’s close statement pushed the pound back from $1.0820 as low as $1.0645. Sterling was trading at $1.0720 by 1557 GMT.

STRONG MARKET PRESSURE

In the UK government bond or gilt market, the pressure had been even more intense as five-year bond prices were on course for their second-biggest daily decline since at least 1991, behind only Friday’s historic plunge.

The two-year gilt yield, the UK government’s cost of borrowing for two years, hit 4.573%, its highest since September 2008, a full percentage point in the last two trading days, as Prime Minister Liz Truss’s government appealed to investors lost credibility.

Gilt yields barely reacted to the combined statements, but very short-term interest rate futures reduced the likelihood of an emergency rate hike in the coming week.

Mohamed El-Erian, Allianz chief economic adviser, had previously said the central bank will have no choice but to hike rates if Truss and Kwarteng don’t back down.

“And not by a bit, by 100 basis points, by a full percentage point, to try and stabilize the situation,” he told BBC radio.

Truss, the former British foreign secretary, was elected prime minister earlier this month by a vote of the 170,000 Conservative Party members – not the broader electorate – after an internal party rebellion ousted Boris Johnson from power.

She largely beat her rivals for the top spot by pledging to restart economic growth through tax cuts and deregulation to end the largely stagnant real wage growth that has characterized her party’s 12-year reign.

Their pledge to end the so-called “Treasury orthodoxy” and work towards growth marked a crucial shift in British fiscal policy, and tied in with the doctrines of the Thatcher and Reaganomists of the 1980s.

“Markets are going up and down,” said a veteran Conservative Party source, who declined to be identified. “We’ve done something structural in the short term that will have seismic and positive long-term benefits.”

writing by Kate Holton and Amanda Cooper; additional reporting from Elizabeth Piper, Kylie MacLellan, Andy Bruce and Harry Robertson; Edited by Hugh Lawson, Mark Potter and Toby Chopra

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