Bank to inflate interest rates after pound’s fall
The Bank of England has asserted that it will “not hesitate” to increase interest rates to thwart inflation after the pound dropped to a record low against the US dollar.
According to the Bank, it was “monitoring developments closely” and would make a decision on any action in November.
This was contained in a statement after the Treasury said it would disclose a plan to handle debt in an effort to reassure investors.
Sterling fell to an all-time low earlier against the US dollar after Chancellor Kwasi Kwarteng pledged further tax cuts at the weekend on top of Friday’s mini-budget where he declared the biggest tax cuts in 50 years.
The pound rose by more than 1% to top $1.08 in Asia currency market trade on Tuesday.
Also ,on Monday, some UK lenders said that they were stopping new mortgage deals.
According to Halifax, the UK’s largest mortgage lender, it would temporarily revoke all mortgage products that come with a fee due to the market volatility.
Virgin Money and Skipton Building Society have also quit offering mortgage products to new customers.
A rise in the cost of long-term borrowing due to the market turmoil meant the cost to lenders of offering new mortgage deals was too expensive, experts say.
The pound had been slipping as global markets responded to the sharp rise in government borrowing required to fund the cuts.
A weak pound makes it more expensive to buy imported goods and risks pushing up the rising cost of living even further.
Imports of commodities priced in dollars, including oil and gas, are also more expensive.
UK inflation, the rate at which prices rise, is already rising at its fastest rate for 40 years.
Some economists had forecasted the Bank of England would call an emergency meeting in the coming days to raise interest rates in a bid to stem the fall, as well as calming rising prices.
However, the Bank of England instead said it was “monitoring developments in financial markets very closely” and would make a full assessment at its next meeting on 3 November.
Investors are now anticipating that interest rates could more than double by next spring to 5.8% from their current 2.25%, to curb high inflation, which is expected to be fuelled by the huge tax cuts announced in Friday’s mini-budget.