top of page

Bank of England 'will not hesitate to change interest rates as necessary' after the pound's fall

Updated: Nov 7, 2023


Sterling lost about 5% of its value on Monday, falling to $1.0327 before stabilizing at about $1.08.

The markets reacted poorly to the chancellor's tax-cutting mini-budget, prompting the Bank of England to state that it "will not hesitate to alter interest rates as necessary."

The Bank stated in a statement that it was "vigilantly monitoring developments in financial markets in light of the material repricing of financial assets."

It happened when the pound hit a record low when compared to the dollar, leading the market to speculate that the regulator could be compelled to step in and boost interest rates even higher than it had initially planned.

The Treasury also made an effort to allay market concerns by indicating when it will disclose more specifics about its growth strategy, but both comments had the opposite effect, causing the pound to resume its decline to the lows of Monday morning. The pound quickly decreased and settled at roughly $1.06 after stabilizing at around $1.08 on Monday afternoon. On Friday morning before the mini-budget, it was still down.

On November 23, Chancellor Kwasi Kwarteng will present a "medium-term fiscal plan," according to a statement released by the Treasury on Monday afternoon.

The Office for Budget Responsibility (OBR), which is in charge of producing impartial economic projections and analyses for budgets, will also release its forecasts in conjunction with the publication of the November fiscal plan, the Treasury said.

Due to the fact that last Friday's mini-budget was not a conventional budget, the body did not offer analysis or projections.

The Treasury announced that an OBR anticipated budget will also be presented in the spring. It also stated that ministers would make additional announcements in early November that were aimed at boosting growth.

After Mr. Kwarteng revealed the most comprehensive package of tax cuts in 50 years earlier on Monday, the value of the pound fell by about 5% to $1.0327, which is below the previous record low versus the dollar recorded in February 1985.

Given the additional pressures it will make on government borrowing, the market gave its opinion on the viability of the public finances after the £45 billion tax-cutting package. Concerns have been raised that the tax cuts may increase inflation, which the Bank of England has committed to controlling.

The rates requested in exchange for investor capital reached levels last seen in 2008. Bond markets also continued to reflect the confidence issue.

A weak pound will increase the cost of importing products in dollars, which will be passed on to consumers.

"A weakening pound is a terrible news for drivers at the pumps since wholesale fuel, like oil, is exchanged in dollars," said Simon Williams, the RAC's fuel spokesman.

"Fortunately, wholesale gasoline and diesel costs have decreased in recent weeks due to the decline in the price of oil, which has resulted in lower prices at the pumps. However, if the price of oil were to rise again, the weak pound would undoubtedly cause drivers to spend much more to fill up."

Clearly, the government's growth strategy caused the decline on Friday. However, dealers claimed that when the dollar also soared against other currencies, it had since broadened the focus.

In the wake of Italy's elections, which will see a far-right leader take over as the country's new PM, and amid mounting recession fears related to the crisis in Ukraine, the euro plunged to new 20-year lows against the dollar.

The problem for the UK and Europe as a whole is that weak currencies increase the cost of products in dollars, driving up import prices and escalating inflation.

Because the value of the pound has also fallen significantly against the euro, hovering at €1.0948 - leaving it 10 cents lower since August - the UK is also seeing goods from the continent becoming more expensive.

"A national emergency exists,"

The yield on the benchmark 10-year gilt hit about 4.1%, the highest level since April 2010, as a result of the increase in the cost of government borrowing.

The Reuters news agency analyzed the Bank of England and Refinitiv figures, which indicated that the yield was on course to experience its largest monthly increase since 1957.

Bonds with shorter maturities were trading at levels unseen since the financial crisis.

Rachel Reeves, the shadow chancellor, stated at the Labour Party Conference: "There is a national emergency at hand.

"The cost of the weekly food purchase has increased, energy prices have increased, and people's salaries have not.

"The chancellor had the chance to present a serious solution to the crisis caused by rising living costs on Friday. He also failed."

The government's position that it would not comment on market movements or interest rates was underlined by the PM's spokesman, who also stressed how crucial it was to maintain the independence of the Bank of England.

Mr. Kwarteng asserted that the government's plans to renew the UK's sluggish economy are only getting underway with his announcements.

Chancellor defiant over 'long-term growth plan'

According to reports, Mr. Kwarteng is thinking about eliminating a fee for parents who make over £50,000 and receive child benefits, raising annual allowances for pension funds, and providing a tax break for those who stay at home to care for children or loved ones.

According to supporters and detractors of the prime minister, The Daily Telegraph reported that if the value of the pound dropped to parity with the US dollar, it could set off a rebellion among Tory backbenchers who might refuse to vote for the government's finance bill or submit letters of no confidence.

When asked if the declining value of the pound, declining stock markets, and rising cost of borrowing by the government were concerning him, Mr. Kwarteng responded, "We need to have a much more front-footed approach to growth, and that's what my Friday message was all about.

"My attention is entirely on getting some of the changes passed... if we can get business up and running, we can move our country and expand our economy," the president said.

"I've been focused on the longer term and the medium term, and I think it was extremely vital that we had a long-term growth plan," he said when asked about market fluctuations.



bottom of page