After the pound sank to a historic low versus the US dollar, the Bank of England declared that it will “not hesitate” to raise interest rates to combat inflation.
The Bank stated that it was “closely monitoring developments” and will decide on a course of action in November.
Its declaration followed the Treasury’s announcement that it will publish a plan to combat debt to reassure investors.
Tuesday trading on the Asian currency market saw the pound rise by more than 1 percent to surpass $1.08.
On Monday, several British lenders announced they were suspending new mortgage arrangements.
Halifax, the largest mortgage lender in the United Kingdom, announced it will temporarily suspend all fee-based mortgage products owing to market instability.
Virgin Money and Skipton Building Society have likewise ceased offering new consumers mortgage products.
According to experts, a surge in the cost of long-term borrowing as a result of market turbulence made it too expensive for lenders to offer new mortgage agreements.
Sterling plummeted to an all-time low against the U.S. dollar after Chancellor Kwasi Kwarteng offered additional tax cuts over the weekend, in addition to announcing the largest tax cuts in half a century in Friday’s mini-budget.
As global markets reacted to the huge increase in government borrowing required to cover the cuts, the pound weakened.
A weak pound makes imported items more expensive to purchase and threatens to exacerbate the growing expense of living. Imports of dollar-priced goods, such as oil and gas, are also more expensive.
Inflation, the pace at which prices increase, in the United Kingdom is rising at its quickest rate in forty years.
Some economists had projected that the Bank of England will convene an emergency meeting in the following days to hike interest rates to halt the decline and tame inflation.
However, the Bank of England stated that it was “closely monitoring developments in financial markets” and would provide a comprehensive review at its next meeting on 3 November.
To limit excessive inflation, which is likely to be fueled by the massive tax cuts proposed in Friday’s mini-budget, investors forecast that interest rates might more than double by next spring, from their present level of 2.25% to 5.8%.
‘Not inexpensive’
According to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, if interest rates rise as projected, the average homeowner refinancing a two-year fixed-rate mortgage in the first half of next year will see their monthly payments increase from £863 to £1,483.
He stated, “Many will not be able to pay this.”
A double dose of attempted reassurance in the late afternoon, first from the Treasury and then from the Bank of England.
New from the Treasury is a timeline with attached dates. There will be a series of statements from various cabinet ministers regarding the Friday-discussed concepts.
Then, in less than two months, a legislative moment. The “Medium Term Fiscal Plan” and the Office of Budget Responsibility’s number crunching.
In brief, the Treasury’s message is as follows: don’t panic, we know what we’re doing.
Let’s observe what the markets will do next.
The market volatility following Mr. Kwarteng’s mini-budget has also been partially attributed to the government’s choice not to disclose the Office of Budget Responsibility’s forecast of expected UK growth and government borrowing.
Martin Weale, professor of economics at King’s College London and former member of the Bank of England’s Monetary Policy Committee, which votes on interest rates, stated that the public is “concerned that the government lacks a plan to bring the national debt under control.
“The pound has fallen because market traders are fearful of the government’s intentions, and I believe they became even more fearful over the weekend when they realized that this was only the first installment of some tax cuts.”
However, Lord David Frost, a Conservative peer and former senior Brexit negotiator stated that the reaction on global markets was “excessive.”
I don’t believe anything has gone awry, in fact, Liz Truss promised change, a different economic strategy to return us to growth and away from stagnation.
He stated that, as part of this shift in strategy, interest rates will rise and the government would need to provide further support through tax cuts, and that, while it would need to reduce spending over the medium term, November would provide the specifics.
The government stated that its financial plan due on November 23 would include the Office of Budget Responsibility’s complete growth and borrowing projections.
It also promised to provide additional information on the government’s spending policies, including how it intends to reduce debt.
Paul Dales, the chief UK economist at Capital Economics, said that given the pound’s decline since the Bank and the Treasury’s statements, the markets “may need more reassurance and actual action,” suggesting that a change in government policy or an interest rate hike by the Bank at an emergency meeting before 3 November may be necessary.
