by Amanda Cooper
LONDON, Sept 26 (Reuters) – The pound fell to an all-time low against the dollar on Monday and British government bonds tumbled, three days after a fiscal stimulus plan was unveiled that worried investors at the point that some want an emergency intervention from the Bank of England.
Finance Minister Kwasi Kwarteng on Sunday downplayed the national currency’s depreciation since his speech in parliament, saying his priority was boosting the country’s growth potential and not short-term market reaction.
He had announced before the House of Commons on Friday massive cuts in taxes and duties but without specifying how the government intends to finance them.
His speech accelerated the decline in government bonds, and therefore the surge in their yields, which recorded their largest one-day rise in several decades, while the London Stock Exchange fell to its lowest since March.
The pound lost up to 5% on Monday, falling to 1.0327 dollars, its lowest level since the United Kingdom’s transition to the decimal system in the early 1970s.
By midday, the currency was still down 0.46% against the greenback at 1.0806; against the euro, it was almost stable at 1.1195.
Many politicians have expressed concern over the fall.
“I started my career as an economist at the Bank of England and like everyone else I’m growing increasingly concerned because people are watching,” said Rachel Reeves, Labor Party spokeswoman for questions. financial, to Times Radio.
“This increases the pressure on the Bank of England to raise interest rates.”
Scottish First Minister Nicola Sturgeon has called for an extraordinary session of Parliament to be convened at Westminster.
“THE BANK OF ENGLAND MUST TAKE ACTION”
Many economists and investment managers also believe that the intervention of the central bank – independent of the government – is necessary in order to calm the markets and restore the credibility of the authorities.
“The first option is for (Kwarteng) to recalibrate its plan; it’s politically difficult but economically necessary,” Mohamed El-Erian, chief economic adviser to insurer Allianz, told the BBC.
“The second option is that he hands over to the Bank of England, and in that case the Bank of England should raise rates urgently because they don’t plan to meet until November” , he added.
Investors are currently pricing in an 88% chance of another BoE rate hike at its next “regular” meeting in November, according to Refinitiv data.
For Paul Dales, chief UK economist at Capital Economics, “the continued fall of the pound in early trade means we have reached the point where the Bank of England needs to take action to recover initiative”.
On the bond market, the yield on British two-year debt, the most sensitive to expectations of changes in key rates, jumped more than 54 basis points to 4.568%, its highest level since 2008.
Its rise thus exceeded one percentage point in less than two sessions, which reflects a sharp deterioration in market confidence in the State’s ability to finance its tax reduction programme.
“The market is now treating the UK as an emerging country,” said Rabobank strategist Michael Every. “And he’s not wrong from a policy response perspective of thinking that boosting demand rather than supply is the right way to solve a supply crisis.”
Another symptom of growing investor mistrust: the spread between British and German ten-year bond yields is at its highest level since 1992, when Britain left the European exchange rate mechanism.
(With Kylie MacLellan, David Milliken, Andy Bruce and Harry Robertson;, French version Marc Angrand, editing by Sophie Louet)