Bank of England warns it could hike interest rates after pound plummets to all time low against dollar
THE Bank of England yesterday vowed that it “will not hesitate” to hike interest rates again after the Pound crashed.
It hit an all-time low against the dollar despite a bid by the Chancellor to calm roller coaster money markets.
Bank chiefs stopped short of an emergency rate hike as Sterling tumbled — heaping more pressure on British business and heralding higher prices on clothes, food and the cost of a pint.
The Bank’s bosses said they were simply “monitoring” the situation for now.
It came as the Chancellor tried to placate the markets by saying he would set out more of his financial plans in November, including moves to relax fiscal rules to let him borrow more cash.
The Bank of England claimed it would not hesitate to act to raise interest rates to tackle inflation if needed in the coming weeks.
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Its governor Andrew Bailey said that markets would have to wait until its next scheduled meeting to assess the Government’s recent tax cuts and “the fall in Sterling”.
The Pound started the day at $1.03 after weak trading in Asia, recovered to $1.08 then fell back to $1.06 on lack of Bank rate action.
Neil Wilson, chief market analyst at markets.com, said it was an “inadequate response” and accused the Bank of being “complacent” over inflation.
He said of Mr Bailey’s comments: “It’s a nothing statement that probably does more harm than keeping quiet.”
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Bank chiefs are failing to keep inflation at their target of two per cent — as it soars to nearly five times that.
The last time it intervened to prop up the currency, in the 1990s, it boosted rates to 15 per cent before the Pound crashed out of the European Exchange Rate Mechanism on Black Wednesday.
Some economists warned there could be similar carnage if the Bank started repeating its past.
And they predicted interest rates could now reach six per cent next year — slapping a whopping £627 more on the average household’s monthly mortgage bill.
Average repayments would jump from £863 to £1,490 under their eye-watering predictions.
Halifax, the UK’s largest mortgage provider, Virgin Money and Skipton Building Society all withdrew their mortgage ranges for new customers yesterday because it was impossible for brokers to price potential rates when the markets are so volatile.
Samuel Tombs at Pantheon Economics warned: “Many simply won’t be able to afford this.
“The choice the Bank faces is either to defend Sterling and risk a banking crisis, or let it fall further and accept that inflation will remain above target as far as the eye can see.”
Even if the Bank rate was to increase from its current 2.25 per cent to three per cent, the average buyer would still have to find an extra £100 a month for mortgage repayments, according to Hamptons, the estate agency.
Some traders were betting that the Bank’s statement would not placate markets, with Viraj Patel at Vanda Research saying that it would “last 24 to 48 hours before something breaks in markets and forces the Bank of England to act”.
Health of economy
Nervousness around the health of the economy has made government borrowing much more expensive, with yields on gilts at more than four per cent — the same levels as the financial crisis — putting the cost of public debt up even further.
The Chancellor spooked financial markets by announcing the biggest tax giveaway since 1972 at last Friday’s “mini Budget”.
Mr Kwarteng promised £45billion of tax cuts last week and said further borrowing would be used to pay for it.
The Pound continued to tumble after he hinted at the weekend there would be “more to come”.
Yesterday the Treasury sought to calm the shaken markets by saying Mr Kwarteng would map out his blueprint to reduce massive levels of borrowing with a “Medium Term Fiscal Plan” on November 23.
He promised to reveal a book of spending and growth predictions from the Office for Budget Responsibility alongside that, and a full Budget next year.
Separate changes to immigration rules to allow more foreign workers to plug staff shortages will be unveiled around late October.
Economist Gerard Lyons, who has advised new PM Liz Truss, said Mr Kwarteng needs to address market concerns immediately and questions about affordability.
He said: “The Chancellor probably could have done more work ahead of Friday to keep the markets onside and there’s clearly a need now, as we’ve seen from the market reaction, to address head-on those market worries.”
The Chancellor refused to comment yesterday when seen with aides outside his Treasury office.
Doubling down on their economic plans, the PM’s spokesperson said: “It is right, as we did in the pandemic, to use the tools available to government to support households, businesses and jobs through the current challenges.
“It is equally right to ensure that we have a plan that delivers growth and innovation, that unlocks investment and results in high tax revenue.”
Tory MPs were at loggerheads last night over the Government’s handling of the situation.
Cabinet ministers slapped down speculation that some have already started putting in letters of no confidence to the new PM.
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But one MP said: “We need total discipline and unity in the ranks
“Undermining our economic approach after just a few days needs to be called out”.