Bank of England’s wait-and-see approach unlikely to calm nerves
After a day of wild speculation in the City of London that left the pound in apparent freefall, the Bank of England had little choice but to break its usual silence on day-to-day currency market movements.
Sterling had plunged overnight in Asiato its lowest level in history against the US dollar, in a punishing verdict on Kwasi Kwarteng’s £45bn of unfunded tax cuts announced last week.
The resulting Threadneedle Street statement was, however, a far cry from the cavalry arriving to help Britain’s increasingly battered currency. Some investors were betting on an emergency interest rate increase to shore up confidence. Instead, the Bank’s governor, Andrew Bailey, said events were being monitored closely. The message was the markets could wait. The Bank’s next monetary policy committee (MPC) decision would not come until November.
The pound had been recovering some ground ahead of the intervention only to resume a sharp selloff afterwards.
An emergency rate increase may never have been likely, given the proximity to Kwarteng’s mini-budget. Such a move would have been a political hand grenade from the Square Mile to Westminster at a time when Bailey is already under intense pressure from politicians questioning his leadership.
The Bank will hope that the initial dislocation in markets as investors digest the implications of Kwarteng’s tax cuts eventually subsides. Yet with blood in the water, and sharks circling the currency, the danger is growing that the Bank, and the government, are losing control of events.
That uncertainty was reflected by the subsequent resumed fall in the pound, touching $1.06, and a further rise in the cost of government borrowing to the highest levels since 2008. Britain’s credibility to make good on its
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