Pound falls again as Bank of England says it ‘won’t hesitate to change interest rates’
THE value of the pound has fallen again as the Bank of England says it "won't hesitate to change interest rates".
However, the Governor of the BoE Andrew Bailey avoided hiking interest rates as an emergency measure this afternoon.
The pound has fallen to its lowest level against the dollar since decimalisation in 1971.
Sterling fell by more than 4% to just $1.03 in early trading in Asia, before recovering to $1.09 this afternoon. After the statement from the BoE it fell again to $1.06 as of 16:44pm today.
The Bank of England said that it will make a "full assessment" at the next scheduled meeting of the monetary policy committee, which is on November 3.
Bailey added that the BoE was "monitoring developments in financial markets very closely".
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He added: "The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit."
The next MPC meeting - where interest rates may be moved - is November 3.
Chancellor Kwasi Kwarteng has urged markets to "keep calm" and carry on as the value of the pound against the dollar tumbles to a record low.
The Treasury confirmed this afternoon that Kwasi Kwarteng will set out another medium-term fiscal plan on November 23.
Over the weekend, the Chancellor said in an interview with the : "It's very important to keep calm and focus on the longer term strategy."
The statements were made over the weekend but No10 has stood by the stance this morning, adding that they do not comment on market or currency movements.
A No10 spokesperson said this morning: "We don't comment on market or currency movements.
"It is right as we did during the pandemic to use the tools available to government to support households, businesses and jobs through the current challenges."
Stock markets around the world slid today as investors concerns over high interest rates, inflation and energy shortages continue to grow.
The FTSE 100 closed at 7001.83 down 16.7 points.
The index tracks the performance of the UK's 100 biggest companies.
Oil prices also hit a nine-month low on Monday before recovering some ground, as recession fears and a strong dollar spooked markets.
Mortgage lenders are understood to have pulled some of their fixed rate products as the industry braces for another rise to interest rates.
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The euro also hit a fresh 20-year low amid recession and energy security fears.
The pound's value against the euro has fallen in recent weeks at 4.50pm it hit 1.10euro, down 0.93% today.
The pound plunged on Friday to a 37-year low after the Chancellor announced his mini Budget.
Kwasi Kwarteng has brushed off questions about the markets’ reaction to his mini Budget.
His plans outlined the biggest programme of tax cuts for 50 years, costing more than £70 billion of increased borrowing.
The Chancellor confirmed that the 1.25% point increase to National Insurance will be scrapped from November 6 - savings the average household £330 a year.
A 1p cut to the basic rate of income tax which will save 31million people £170 a year on average was also announced.
The government also scrapped the very top rate of income tax for all workers.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said: "The pound has been on a fast downwards track of a rollercoaster, plunging to record lows yet again this morning, as confidence in the government’s economic management continues to evaporate.
"The fresh bout of panic appears to have been brought on by rumours that the Bank of England may step in with an emergency rate hike to try and shore up support."
The news comes as a new report suggests that the UK economy will grow less than previously predicted this year and flatline entirely in 2023.
Why is the pound falling?
The pound is slumping because investors are worried about the huge increase in government debt required to fund the £45 billion of tax cuts and energy support relief for households and businesses.
There are fears about how the mini budget’s massive tax cuts will be funded and a lack of official costing hasn’t helped.
A huge increase in public borrowing also comes at the worst possible time as government debt has become much more expensive.
Interest on government debt - known as yield on gilts - is trading at levels last seen in the financial crisis of 2008, showing that investors think the UK’s economy is risky.
Is there any other driver?
The pound had already been falling against the dollar this year because of worries about rising prices (inflation) caused by the energy crisis.
The Bank of England has been widely criticised in not being aggressive enough at raising interest rates to tackle runaway inflation, including last week when it lifted them by 0.5% to 2.25%, below what the market expected.
What does a weak pound mean for me?
t's a blow for anyone buying holiday cash now as you'll get fewer dollars for each pound you exchange.
If the value of the pound versus the dollar is $1.05/£1 then for every £100 you change up, you get £105 dollars.
That means buying anything abroad seems more expensive, and can impact on what you can afford to do on your holiday.
There are some steps you can take to make your travel money go further.
These are specific debit and credit cards designed for using abroad, which won't charge you for each transaction like a standard card will.
In the coming weeks shoppers will face higher prices because British companies import goods in dollars, particularly fashion, electronics and ingredients and will have to pass that on.
Energy bills will keep rising because despite gas and oil prices falling, the market is priced in dollars.
The boss of Carlsberg Martsons, Paul Davies, has warned that pints of beer could also get more expensive because brewers import hops from overseas.
The weak pound is also hitting drivers in the pocket, despite petrol prices falling.
Petrol prices fell below 166p a litre for the first time since May on Wednesday.
But oil is priced in dollars and the weak pound has already added almost a fiver more to a tank of fuel when filling up at the pumps, according to the AA.
Further action by the BoE to increase rates could impact the cost of borrowing, including loans, credit cards and mortgage repayments more expensive.
It means more misery for households who are already grappling with a cost of living crisis.
A weaker pound can also have an impact on the value of your pension or any investments you might have.
This is because if you hold shares in a company based overseas, their value is affected by currency movements.
If you notice a dip in the value of your investments, it's best not to panic or be tempted to sell.
What’s the upside?
The UK could become a hotbed for overseas investors who will take the opportunity to invest in assets at cheaper prices.
British services will also be more attractive to export, because it’ll be more competitive.
Tourism could also get a boost from shoppers and visitors wanting a bargain.
When are we going to get out of this?
It depends if the Bank of England acts and raises interest rates to try and support the pound.
It only happened before in the 1990s, but that was when the pound was part of the exchange rate mechanism and interest rates were pushed higher to 15 per cent.
The Chancellor’s mini budget is designed to be pro-growth and if more investors buy into the idea that it will help bounce Britain out of recession faster than its European rivals, the pound could strengthen again.
Will the Bank of England raise rates?
A weak pound could also mean more action from the Bank of England (BoE), which has already increased rates in a bid to tackle soaring inflation.
A further rate rise is expected from its next planned meeting in November.
But further intervention could mean appealing for calm or an unscheduled rate rise.
Any such move would take us back to the 1990s of the Bank of England trying to prop up the Pound.
The Bank of England declined to comment on the nature of any intervention.
Britain’s central bank raised interest rates last week by 0.5 percentage points to 2.25%.
The central bank also warned that the UK economy will likely officially enter recession by the end of the month.
The Bank of England now expects inflation to peak at 11% this October, compared to its earlier forecast in August of 13.3%.
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This would would mark the highest inflation the UK has witnessed since January 1982.
The central bank has already hiked the base rate six times this year.