Sterling crisis puts spotlight on Bank of England and UK Treasury

 

Disrupted Times  Global Economy

Sterling crisis puts spotlight on Bank of England and UK Treasury

 

After a calamitous day for sterling, the BoE said it would assess the turbulence in UK financial assets at its next scheduled meeting in November © Financial Times

 

Vanessa Brown YESTERDAY

https://www.ft.com/content/c5ec4b5f-03b3-4ffe-84f6-cef224441338

 

Good evening,

 

The pound’s fall to a record low today triggered turmoil in financial markets and a late statement from the Bank of England and Treasury did little to settle investor nerves.

 

The central bank said it would assess the turbulence in UK financial assets at its next planned meeting in November after sterling lost as much as 4.7 per cent to trade as low as $1.035 against the dollar earlier today.

 

The market jitters also led the government to issue a statement bringing forward plans for a new “medium-term fiscal plan” to be published on November 23.

 

UK government bonds remain under heavy selling pressure, with the 10-year gilt dropping in price, pushing yields up by 0.38 percentage points to 4.2 per cent. Two-year yields, which are particularly sensitive to interest rate expectations, have surged to 4.5 per cent, from 3 per cent at the end of August.

 

While the investor sentiment following UK chancellor Kwasi Kwarteng’s vow to stick with his debt-financed tax cuts and energy subsidies is clear, the fiscal shift has prompted mixed reactions among Conservative MPs.

 

Many have expressed fears about the effect on sterling, with former chancellor George Osborne saying: “You can’t just borrow your way to a low-tax economy . . . you can’t have small-state taxes and big-state spending.” However, farming minister Mark Spencer praised the agenda as “ambitious” and said it would “stimulate growth within the economy that benefits us all”.

 

Meanwhile, Paul Marshall, chief investment officer of Marshall Wace, accused the BoE of having “lost control of the UK bond market”, adding: “Its timidity is now having an impact on both the gilt market and sterling. That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence, it is doubly hard to win it back.”

 

But finance and economics commentator Toby Nangle put the blame for the market reaction squarely at the feet of Kwarteng. “It largely reflected financial markets getting increasingly concerned about the direction of UK macroeconomic policy,” he said.

 

“Nothing in gilt markets in the past 35 years — not the UK’s ejection from the Exchange Rate Mechanism, 9/11, the financial crisis, Brexit, Covid or any Bank of England move — compares with the price moves in reaction to the chancellor’s mini-Budget,” he added.