Pound Comes Under New Pressure After Bank of England Fails to Raise Rates

By Staff, Agencies

British ministers have been struggling to prevent a full-scale loss of financial market confidence in its economic strategy after the Bank of England’s decision to rule out an emergency rise in interest rates prompted fresh selling of the pound.

Attempts by Threadneedle Street and the Treasury failed to repair the damage caused by Kwasi Kwarteng’s mini-budget last Friday, with sterling falling to a record low against the US dollar.

Within minutes of the Bank saying that it intended to wait until November before responding to the recent turbulence, the pound had dropped two cents against the dollar and was within three cents of the record low of $1.03 hit in Far East trading overnight.

Some mortgage lenders – including Halifax, the UK’s biggest home loan provider – temporarily withdrew their products as financial markets predicted the Bank would need to raise interest rates from 2.25% to 6% to restore confidence.

Nomura, the Japanese bank, forecast that the pound would end the year below parity against the dollar while Paul Donovan, the chief economist at UBS global wealth management, said investors were inclined to see the Conservative party as a “doomsday cult.”

In a sign that international policymakers are growing increasingly alarmed by the recent turmoil, Raphael Bostic, the president of the Atlanta Federal Reserve, warned the sell-off in the pound reflected rising uncertainty about the direction of the UK economy.

The Bank raised interest rates by half a percentage point to 2.25% the day before Kwarteng’s mini-budget on Friday and is nervous about inflicting too much pain on an economy it already considers to be in recession.

But markets now believe that talking tough will not be enough and that official borrowing costs will need to rise sharply to reverse sterling’s slide – a squeeze that would wipe out any boost from the chancellor’s growth push and lead to soaring mortgage rates for millions of homeowners.