The British pound stabilized on Tuesday as UK authorities sought to allay investor concerns after the biggest tax cuts in 50 years sent the currency to record lows and prompted some companies to speculate on a devastating combination of a weak currency and rising ones predict interest rates.
The turmoil is already having an impact on the real world, with UK mortgage lenders pulling hundreds of offers from the market amid expectations that the Bank of England will hike interest rates sharply to offset the inflationary effects of the pound’s recent plunge.
The Bank of England’s chief economist conceded that policymakers “cannot be indifferent to the repricing of financial assets in recent days”.
Huw Pill said: “It’s hard not to conclude that all of this will require a significant monetary policy response” as the bank seeks to keep inflation under control, which has reached 9.9 percent, the highest among major economies to achieve their target of 2 percent.
“We have to have confidence in the stability of the UK economic framework,” he said at the Barclays-CEPR International Monetary Policy Forum.
The pound was trading around $1.07 on Tuesday afternoon after falling as low as $1.0373 early Monday. The British currency is still down 4% since Friday, when Chief Financial Officer Kwasi Kwarteng announced plans for £45 billion ($49 billion) of unfunded tax cuts. The pound is down 20% against the dollar this year.
Kwarteng’s announcement, which comes at the same time as the government plans to borrow billions to protect households and businesses from rising energy prices, sparked concerns that the new government’s policies would increase public debt and further fuel inflation.
Late Monday, the central bank said it was monitoring financial markets “closely” and was prepared to hike interest rates “as much as needed” to lower consumer prices. The bank’s monetary policy committee is not due to meet until November 3.
“There is no rate hike today and speculators will relish the prospect of two months of inactivity from the Bank of England if the statement is taken at face value,” said Alastair George, Edison Group’s chief investment strategist.
The UK Treasury also tried to reassure investors, saying it would present a more detailed fiscal plan and independent analysis from the Office for Budget Responsibility on November 23.
“I am confident that our approach will work with our growth plan and the forthcoming medium-term financial plan _ in close cooperation with the bank _,” Kwarteng said in discussions with investors on Tuesday after the “mini-budget? he detailed last week.
This did little to quell criticism of the government’s policies. Meanwhile, companies were trying to assess how they would deal with the sudden change.
Virgin Atlantic Chief Executive Shai Weiss urged incoming Prime Minister Liz Truss to make the “difficult decision” and try to boost the currency’s value. Some economists are warning that the pound could reach parity with the dollar for the first time later this year.
“Sometimes all of us in this room should be humble enough to say, ‘If I’ve done something that’s not working, maybe I should reverse course,'” Weiss said at a news conference in London.
Weiss added that the weakened pound is “hurting the economy and consumers because it’s actually fulfilling or fueling the cycle of inflation we’re in.”
Wine merchants are among many UK businesses hit by the falling pound. According to the Wine and Spirit Trade Association, a fifth of all cask wine imported into Britain comes from the United States. The dollar has also appreciated against many currencies as investors look for stability.
“The sterling crash will push up prices for consumers and put hundreds of British jobs at risk at bottling plants across the UK,” said Milles Beale, the group’s chief executive.
Kwarteng and Truss, who replaced Boris Johnson as prime minister on September 6, are betting that lower taxes and less red tape will eventually generate enough additional revenue to pay for the tax cuts announced on Friday. But many economists think the gamble is unlikely to pay off.
Torsten Bell, head of the Resolution Foundation, a think tank focused on improving living standards, said markets would look at the government’s plans “and say that’s not what serious policymaking looks like.”
The market reaction to Friday’s announcement will hurt consumers by fueling inflation in the short term, increasing mortgage payments in the medium term and boosting government debt in the long term, the foundation said on Monday.
“The world we’re heading into is a bumpy couple of weeks,” Bell told Sky News. Kwarteng “is going to have a pretty tough time now because he’s now set on balancing the books in November. It’s going to be very difficult.”