Sterling slides back towards record low despite Bank of England and Treasury attempts to reassure markets – business live

Newsflash: The governor of the Bank of England has announced that the Bank ‘will not hesitate’ to change interest rates as needed, following the plunge in the pound since the mini-budget.

But it has not decided to implement an emergency rise in interest rates today, as some economists had expected – a move that has knocked the pound back towards this morning’s record lows.

It’s now down back below $1.07, having recovered to $1.09 earlier this afternoon.

Andrew Bailey says that the Bank is monitoring developments in financial markets “very closely” in light of the significant repricing of financial assets.

And he says that the Bank will make a full assessment of the government’s Growth Plan at its next scheduled meeting in early November.

Bailey says:

In recent weeks, the Government has made a number of important announcements. The Government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today. I welcome the Government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances.

The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will 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, and act accordingly.

The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.

Today’s statements from the Bank of England (here) and the Treasury (here) can at best be described as “too little, too late”.

So says Alastair George, Chief Investment Strategist at Edison Group.

George expalins that the government have triggered a sterling crisis – and resolving it will cause serious economic pain.

George explains:

The pro-cyclical mini-budget is seen as counter-intuitive to international investors in the UK who must be wondering if politicians understand the ramifications of policies which have triggered a meaningful sterling crisis.

“Gilt yields and interest rate futures have jumped 1% since only Friday as traders expect the Bank of England to ultimately be forced to act to defend the currency - and at the expense of braking the domestic economy hard.

We fear this is will not be an easy situation to stabilise – monetary policymakers need to act decisively head off speculative attacks on the currency, separately from the relative merits or otherwise of the recently announced fiscal measures.”

The pound has now slipped back to $1.065, down two cents today, on top of the four cent plunge on Friday.

That’s till three cents above its record low overnight… but only one a cent above the previous all-time low for sterling, of $1.0545 set in 1985.

The volatility in the financial markets is forcing some mortgage producers to temporarily suspend their products, Reuters reports.

British lenders Virgin Money and Skipton Building Society temporarily withdrew their mortgage ranges for new customers on Monday because of the volatility in sterling funding markets, according to emails sent to brokers.

“Following a number of changes in the market, we have made the decision to temporarily withdraw all our products for new customers at 8pm tonight,” Virgin Money said in its email to brokers, seen by Reuters.

“We continue to monitor the situation closely and currently plan to relaunch products for new customers towards the end of the week.”

Earlier today, lender Halifax said it had temporarily withdrawn from the market all of its mortgage products that come with a fee, in response to turmoil in British funding markets.

A Halifax spokesperson said in a statement.

“As a result of significant changes in the cost of funding, we’re making some changes to our product range.”

Halifax, part of Lloyds Banking Group said there was no change to its product rates and that it continued to offer fee-free options at all product terms and loan-to-value levels.

UK government bond prices are tumbling even further, pushing up the yield (or interest rates) even higher.

The cost of borrowing for a decade has now hit 4.2%, from 3.5% in the middle of last week (before the mini-budget).

Another sign that the twin statements from the Treasury and the Bank of England have not immediately calmed the markets….

The FT’s Chris Giles isn’t impressed by the Bank’s statement:

The government and the Bank of England have done the ‘bare minimum’ this afternoon to reassure markets, says Paul Dales of Capital Economics.

It remains to be seen whether today’s statement by the government and the Bank of England will be enough to ease the markets’ fears about the government’s fiscal policy, Dales warns, adding:

The initial reaction in the markets, with the pound falling again after it regained some ground, suggests that the issue may not be put to bed yet.

Either way, the end result will probably be interest rates rising sooner and further (perhaps from 2.25% to 5.00%) in the coming months.

This chart shows how the pound was unmoved by Kwasi Kwarteng’s pledge to outline his plans to achieve stable public finances in November, and then fell after the Bank of England did not announce an emergency rate hike.

Viraj Patel, foreign exchange & global macro strategist at Vanda Research, suspects the Bank of England may be bounced into taking action, if ‘something breaks’ in the markets this week.

Neil Wilson of Markets.com calls the Bank’s response to the sterling crisis ‘inadequate’.

Andrew Bailey’s pledge that the Bank “will not hesitate to change interest rates as necessary” has disappointed some analysts, who were expecting more decisive action.

Traders are concluding that there is less chance of an emergency rise in interest rates.

Here’s some snap reaction:

Newsflash: The governor of the Bank of England has announced that the Bank ‘will not hesitate’ to change interest rates as needed, following the plunge in the pound since the mini-budget.

But it has not decided to implement an emergency rise in interest rates today, as some economists had expected – a move that has knocked the pound back towards this morning’s record lows.

It’s now down back below $1.07, having recovered to $1.09 earlier this afternoon.

Andrew Bailey says that the Bank is monitoring developments in financial markets “very closely” in light of the significant repricing of financial assets.

And he says that the Bank will make a full assessment of the government’s Growth Plan at its next scheduled meeting in early November.

Bailey says:

In recent weeks, the Government has made a number of important announcements. The Government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today. I welcome the Government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances.

The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will 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, and act accordingly.

The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.

The decision to not hold a new spending review means government departments face a funding squeeze, as budgets will not be adjusted to address soaring inflation.

The Times explained this morning that:

Millions of public sector workers face a two-year pay squeeze before the general election after Kwasi Kwarteng said he would go further in cutting taxes.

The government has abandoned plans for a new spending review, despite forecasts that inflation may remain in double figures for the next year. This means that public sector workers will have real-term pay cuts before 2024 and schools and hospitals will have to make tough choices about budgets.

Kwasi Kwarteng is trying to calm the markets by pledging to outline in November how he plans to bring down debt, as a share of the economy, in the medium term.

Mujtaba Rahman, MD of Eurasia Group, explains:

Newsflash: UK chancellor Kwasi Kwarteng is to lay out his Medium-Term Fiscal Plan on 23 November, the Treasury has announced.

Significantly, the plan will show how debt will fall as a share of GDP in the medium term, following turmoil in the markets about the increased borrowing needed to fund Kwarteng’s Growth Plan.

The government is also goiing to set out supply side growth reforms from next month.

And the Office for Budget Responsibility is to release a full forecast, meaning we’ll get an official independent assessment of the state of the economy.

Here’s the full statement:

On Friday 23 September, the Chancellor of the Exchequer, the Rt Hon Kwasi Kwarteng MP, set out how the government would fulfil its commitment to cut taxes for people and businesses and announced wider supply side policies to grow the economy.

Building on this, as the Growth Plan set out on Friday, Cabinet Ministers will announce further supply side growth measures in October and early November, including changes to the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure.

Next month, the Chancellor will, as part of that programme, outline regulatory reforms to ensure the UK’s financial services sector remains globally competitive.

He will then set out his Medium-Term Fiscal Plan on 23 November.

The Fiscal Plan will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.

In the Growth Plan on Friday, the Chancellor set out that there would be an Office for Budget Responsibility forecast this calendar year. He has requested that the OBR sets out a full forecast alongside the Fiscal Plan, on 23 November.

As the Chief Secretary to the Treasury set out this weekend, the government is sticking to spending settlements for this spending review period.

The Chancellor also confirmed that there will be a Budget in the Spring, with a further OBR forecast.

Shadow chancellor Rachel Reeves’s speech to the Labour conference today, amid the sterling crisis, has highlights its claim to be party of economic competence.

Rachel Reeves can rarely have had an easier gig, our economics editor Larry Elliott reports:

The shadow chancellor stood up to speak at Labour’s conference with the pound under pressure and rumours swirling that the Bank of England was about to announce an emergency increase in interest rates.

Labour has a recurring struggle to portray itself as the party of economic competence. Famously, Denis Healey dashed to Blackpool in 1976 to make an impassioned – but not entirely successful – appeal for conference’s support for tough measures during a previous sterling crisis.

It was all rather different this year. Reeves, a former Bank of England economist, was presented with an open goal thanks to Kwasi Kwarteng’s badly received mini-budget and she was determined not miss it.

Here’s Larry’s full report:

The plummeting value of the pound has sent the interest rate on government debts to a 12-year high, with money markets predicting the Bank of England base rate could almost treble to 6% next year.

Sterling tumbled to an all-time low of $1.03 against the dollar overnight before recovering to $1.07 in morning trading as traders priced in forecasts of a major intervention from Threadneedle Street to support the currency.

Traders expect the central bank to convene a meeting of its monetary policy committee (MPC) soon to raise interest rates from 2.25% to 3% before increasing them further at a scheduled meeting in November.

It was understood that officials spent much of Monday morning preparing a statement for the markets after No 10 spokesperson ruled out any comment on the situation by the government.

A statement was expected in late afternoon in the event of further falls in sterling, to send a message to investors that the Bank would use all its powers to bring inflation under control and down to its 2% target.

One analyst described sterling’s situation as “toxic”, while another said investors had digested the implications of Friday’s mini-budget, which stacked a further £45bn of unfunded tax cuts on top of an estimated £150bn bill for its energy price bailout scheme, and “seemed inclined to regard the UK Conservative party as a doomsday cult”.

A further rout of the British currency could take it below parity with the dollar and into uncharted territory on international exchanges.

Here’s the full story:

UK housebuilders’ shares are continuing to be pummelled by fears of sharply rising interest rates, that would hammer the sector.

Taylor Wimpey and Persimmon are both down over 6.7%, followed by Barratt (-5%), Berkeley Group (-4.3%) and property portal Rightmove.

And here’s why – market expectations that interest rates could be hiked back to 6% to prop up the pound.

Borrowing costs haven’t been that high in 20 years.

Tim Farron, former leader of the Liberal Democrats, is offering some help to the government:

Kwarteng isn’t short of textbooks, I suspect, as he has a PhD in economic history from the University of Cambridge.

Fittingly, it’s on Political thought of the recoinage crisis of 1695-7, when William III tried to replace England’s shoddy collection of silver coins. They’d been clipped, or shipped overseas where silver was worth more than the face value of the coins, and melted down.

But the goal of sticking to a gold and silver standard failed, and England eventually moved to a gold standard.

Professor Danny Blanchflower, a former Bank of England policymaker, attributes the pound’s recovery to hopes of a central bank intervention.