Pound falls to new low as ‘mini budget’ shatters investor confidence

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LONDON — The pound slumped to a record low against the dollar early on Monday as investors criticized British markets over the government’s fiscal plan, sparking calls for the Bank of England to take measures to restore investor confidence.

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Finance Minister Kwasi Kwarteng on Sunday dismissed the pound’s freefall that began on Friday after he unveiled his so-called ‘mini-budget’, saying his strategy was to focus on long-term growth and not on the short-term reaction of the market.

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On Friday he announced he would cut a series of taxes, but did not say how the Conservative government, led by newly installed Prime Minister Liz Truss, would fund them.

On Monday, the pound fell 5% against the dollar at one point in Asian trading hours, touching $1.0327, its lowest level at least since the introduction of decimalisation in the early 1970s.

Lawmakers from across the political spectrum have expressed concern over the fallout on financial markets.

“I started my career as an economist at the Bank of England and like everyone else I am incredibly worried about what we saw, both on Friday with the market reactions to the so-called mini- Chancellor’s budget, and also the reactions overnight, » Rachel Reeves, the opposition Labor Party’s finance policy spokeswoman, told Times Radio.

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“It also puts more pressure on the Bank of England to raise interest rates,” she added.

Scottish First Minister Nicola Sturgeon has called for Westminster’s parliament to be recalled to hold an emergency session. « It’s hard to overstate the scale of the economic crisis caused by Friday’s UK budget, » she said on Twitter.

EYES ON BOE

In light of the rout, strategists and economists said the Bank of England needed to do something to calm markets and restore credibility.

« Choice number one is for (Kwarteng) to recalibrate its package – politically difficult but economically necessary, » Mohamed El-Erian, chief economic adviser at Allianz, told BBC Radio 4.

« Choice number two is that he leaves it to the Bank of England and in that case the Bank of England should arrange an emergency meeting as it will not meet again until November. »

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But he said the second option wasn’t a good look.

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“That in itself goes against him. Again the image of driving a car with the Chancellor’s foot on the accelerator and the Governor’s (BOE) foot on the brake. This is not a good way to stimulate the British economy.

Markets are currently showing investors are placing an 88% chance that the BoE will hike UK rates by one percentage point to 3.25% at its next meeting, according to data from Refinitiv.

The pound pared some losses overnight to trade 1.3% on the day against the dollar at $1.07150, while against the euro it was down 0.7% at 89 .88 pence, after hitting a two-year high of 92.29.

The FTSE 100 extended its losses, falling 0.8% on the day, led by sharp declines in homebuilder stocks.

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‘1980s ON STEROIDS’

Yields on two-year gilts, which are most sensitive to the outlook for interest rates and government bonds, rose 54 basis points to a high of 4.53%. The yield rose about a full percentage point in the past two trading days alone, reflecting lack of confidence in the government’s ability to fund its round of tax cuts.

« The Brits decided that going back to the 1980s on steroids was the best way forward, and clearly the market is just saying, ‘That won’t work’, on steroids, » said Rabobank strategist Michael Every. .

“The market is now treating the UK as an emerging market. And they’re not wrong in terms of policy response and naivety in thinking that driving demand rather than supply is how you deal with a supply-side shock.

Further underscoring how much investors have punished UK assets, the difference in UK and German government 10-year borrowing costs exploded to their highest level since 1992, when the UK collapsed from the bailout mechanism. European exchange rate.

UK government bond prices are on track for their biggest fall in any calendar month since at least 1957, according to a Reuters analysis of data from Refinitiv and the BoE.