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Emergency base rate rise possible as pound slumps to new low

by: Paloma Kubiak
  • 26/09/2022
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Emergency base rate rise possible as pound slumps to new low
The pound fell to $1.03 when trading opened in Asia this morning, a low not seen since 1971. While it has recovered slightly, the tax cuts announced in Friday’s mini-Budget continue to send shockwaves through the economy.

Last week saw the Bank of England raise the base rate to 2.25 per cent in a bid to curb soaring inflation.

But the very next day, new Chancellor Kwasi Kwarteng announced a slew of tax cutting measures in his mini Budget “to solve the riddle of growth”, putting more money in Brits’ pockets to spend in the economy.

And reports over the weekend suggest Kwarteng is set to announce more tax cuts, this time helping the “forgotten” middle earners caught up in the cost-of-living crisis. But with these measures expected to be financed by debt, investors were unnerved.

Taken together, it resulted in a pound sell-off, with sterling down near 5 per cent to $1.03 when trading opened in Asia this morning. Fears mounted that it might reach parity with the dollar.

According to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, this is the lowest point since decimalisation in 1971. However, the pound did regain some ground this morning to $1.07.

Joshua Raymond, director at financial brokerage XTB said: “We’ve seen yet more selling in the pound across the Asia trading session. Comments from the Chancellor over the weekend that these tax cuts are just the start have raised suspicion about the state of UK finances in the medium term.

“To emphasise this, the GBP is falling not just against the dollar, but also the euro and yen. That means the latest falls are not just about dollar strength, it’s about sterling weakness.”

Raymond added that the sharp GBP declines “are quickly necessitating intervention by the Bank of England to announce a rate hike that would surprise the market”.

He said: “It could well be the case that to restore some kind of credibility, we might need to see a 2 per cent hike by the BoE immediately. But that sort of intervention could pit the central bank in direct hostility with the treasury, so even if we do see a kind of intervention, it won’t be the end of uncertainty.”

All eyes will now be on the Bank of England as that emergency base rate hike could be on the cards, just a few short days after the last rise.

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