Sterling has recovered ground following speculation that the Bank of England might act in response its fall. But it’s important to note the Bank’s response may not involve raising interest rates in the first instance.
It could try to calm nerves with a statement saying that it is monitoring markets and stands ready to help. That’s the usual first step.
Or, it could use it’s foreign currency reserves, the rainy day fund, to buy up sterling on international markets, to bid up it’s value. But that typically is a very short-term fix - and while the UK has over £100bn ($108bn) in reserves, that’s less than many other nations.
That’s why, increasingly, investors are betting that the Bank will enact an emergency rate rise, ahead of its next scheduled November meeting - perhaps of 1% or more.
That means investors might be keener to put their money in the UK, boosting sterling, as returns would be higher. It would also curb some of the extra inflationary pressures economists fear the mini-budget plans could unleash.
But the Bank’s rate setters will also be mindful that such a move might be interpreted as a vote of no-confidence in the chancellor’s plans
The Bank’s rate-setters need not worry - only LT’s “believers” have faith in the chancellor’s plans …
The pound has fallen back to $1.06 after the Bank of England’s statement.
Before the Bank’s statement, the pound was valued at $1.07 - a rise from early this morning, when sterling had fallen to a record low at close to $1.03.
Some economists had predicted the Bank of England was going to call an emergency meeting in the coming days to raise interest rates in a bid to stem the fall, as well as calming rising prices.
But the Bank of England decided against an emergency meeting to hike rates.
It said it was “monitoring developments in financial markets very closely”, but said it would “make a full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling”.
If the Bank does announce a further interest rate rise on Thursday 3 November, it would be the eighth in a row.
Financial markets are currently expecting rates to hit 5.8% by April next year, up from 2.25% currently.
Saw an article yesterday stating that letters of no confidence in her had already started to arrive on 1922’s doorstep. Wonder how this might affect things if the numbers increase?
And I read that there’s a theory that this tax cutting policy is actually about “starve the beast” (American term of course). The notion is that if you reduce tax takings then the government gets to later turn around and state “we are broke, we just can’t afford the public sector as it is, we need to really, really cut it back”. So theory is that Truss & Kwarteng are aiming for ‘small state’ government and using lack of tax revenue plus high borrowing costs as the necessary reason for these (sure to be very dramatic) cuts.
This all makes sense as without this theory none of it makes any sense.
Maybe it’s a way to lower the costs of housing?
Particularly in the London bubble ?
Force housing prices to collapse (as they will never come down otherwise) ?
Thus making everybody richer !
Just musing!
Why is it that I get the feeling that every government for the last fifty years, contrary to popular belief, are doing everything in their power to destroy the UK and the British way of life?
That’s always been their ambition. It seems that they missed a large part of economic theory in their modelling. It’s a complete shambles. I assume HS2 will now be cancelled?
