UK Sterling on the slide

On Monday, after a day of wild speculation in the City of London that left the pound in apparent freefall, the Bank of England had little choice but to break its usual silence on day-to-day currency market movements. Sterling had plunged overnight in Asia to its lowest level in history against the US dollar, in a punishing verdict for Kwasi Kwarteng’s £45bn ($48bn) of unfunded tax cuts announced last week. The resulting statement was, however, a far cry from the cavalry arriving to help Britain’s increasingly battered currency.

Some investors were betting on an emergency interest rate increase to shore up confidence. Instead the governor, Andrew Bailey, said events were being monitored closely. The message: markets could wait. The Bank’s next monetary policy decision would not come until November. The pound, which had been recovering ground, resumed a sharp sell-off.

An emergency rate increase may never have been likely, given the proximity to the mini-budget. Such a move would have been a political hand grenade at a time when politicians are questioning Bailey’s leadership. The Bank will hope the initial dislocation in markets subsides. Yet with sharks circling the currency, the danger is growing that the Bank and the government are losing control of events.

That uncertainty was reflected by the resumed fall in the pound on Monday, which touched $1.06, and a further rise in the cost of government borrowing to the highest levels since 2008. Britain’s credibility to make good on its commitments as a counter-party to investors is clearly at a historic low.

Part of the pound’s weakness is a function of dollar strength, but that does not explain why sterling fell so rapidly. There are three UKrelated factors behind the fall. First, once a currency hits the skids, it is difficult to stop it. Second, Kwarteng committed a schoolboy error last weekend by pledging further tax cuts in a full budget planned for later this year. If the markets are worried about the increase in borrowing needed to fund government plans, it is not the wisest course of action to add to those concerns. Third, the financial markets are still far from clear about how the Bank will respond, as reflected by the pound’s gyrations on Monday as excitement over a promised intervention was followed by disappointment.

As set out by analysts at the Bank of America, the situation is likely to worsen. “[The] policy backdrop is toxic and is pushing [the pound] towards existential crisis,” they said, warning that interest rates would probably probabl need to rise above 5%. Kwarteng’s Kwarten budget would do little to boost growth, they warned, but would add a to inflationary pressures.

Investor Inves speculation is likely to resume that the Bank may have to act before befo November. A week is a long time tim in economics as well as politics. politics Five weeks may be too long for Threadneedle Thre Street to stay put.