Traders bet on emergency rate hike after pound hits record low

Traders bet on emergency rate hike after pound hits record low
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The pound fell to a record low on Monday, while government bonds took heavy losses, prompting expectations for an immediate rise in UK interest rates following Chancellor Kwasi Kwarteng’s package of tax cuts last week.

The currency fell as low as $1,035 in the early morning to as low as $1,035 as low as 4.7 percent and then 1.07 percent after Kwarteng promised to stick with the weekend tax cut and sparked warnings that the UK was in a currency crisis. stabilized around the dollar.

The early fall has brought the sterling to its lowest level ever recorded. Criticism of Friday’s financial statement sharpened when the Chancellor announced a massive new wave of borrowing to finance the £45bn tax cuts and a package to curb rising energy bills.

“The UK is in the midst of a currency crisis right now,” said Vasileios Gkionakis, head of currency strategy at Citigroup.

Traders raise bets for an emergency interest rate It will stabilize sterling before the Bank of England’s next meeting in November. Futures markets are pricing in a one-week gain of 0.75 percentage points and an increase of over 1.5 points until the November meeting. Rates are expected to rise to 6 percent by May from the current 2.25 percent.

The central bank declined to comment on whether it plans an emergency interest rate meeting this week.

Reflecting the dramatic shift in interest rate expectations, UK government debt continued to drop on Monday after staggering Friday sales, the worst day for the gilded market since the early 1990s.

The 10-year gilding price fell, pushing yields to 4.12 percent, a massive 0.32 percent increase from nearly 3.5 percent before Friday’s financial announcement.

The Treasury did not comment on market movements on Monday. Kwarteng told the Financial Times in an interview last week: “I’m always calm. Markets always move. It is very important to stay calm and focus on long-term strategy.”

$ per £ line chart showing sterling falling against the dollar

Unlike its counterparts in Japan, which intervened last week, the UK lacks the willingness, and possibly the willingness, to intervene directly in the money markets to support the sterling. However, the BoE’s rate-setting Monetary Policy Committee met to restore calm, often by lowering rates, outside of the normal cycle where markets have been turbulent in the past. The BoE has never raised interest rates between scheduled meetings since gaining independence in 1997.

“If I were still in the BoE, I would be tempted to announce an extra meeting in a week,” said Sushil Wadhwani, asset manager and former BoE policy maker.

Westminster’s tax cuts came as the UK is expected to spend £150 billion to subsidize energy costs for consumers and businesses. A large part of this borrowing will be financed by gilding.

Unlike the big tax cuts of the 1980s, Kwarteng is borrowing tens of billions of pounds to finance their plansIt adds to demand at a time when the BoE is raising rates to contain inflation.

“We seem to be moving in a spiral we usually see in emerging market crises, where policymakers struggle to reassert their credibility,” said Mansoor Mohi-uddin, chief economist at the Central Bank of Singapore.

Mohi-uddin said investor confidence in the sterling was undermined by expectations that UK public debt is currently on an “unsustainable upward trajectory” and the country still maintains a “open current account deficit”.

“If we continue to see these big moves in the market, the Bank of England will have to raise interest rates perhaps as much as 1 percent to stabilize the sterling,” he added.

Bank of England raised interest rates On Thursday, it was up 0.5 percentage points after a third consecutive 0.75 point increase the day before by the US Federal Reserve.

“We have argued that the way forward for sterling will depend largely on monetary response to inflation in the near term and well-targeted fiscal measures, but so far delivery is far from encouraging on both fronts,” currency analysts said. Goldman Sachs’s photo.

The currency is likely to weaken further, with large unfunded spending on the fiscal side not comparable to monetary policy to offset the inflationary impulse.”

Shadow Chancellor Rachel Reeves said Kwarteng had “fanned the flames on Sunday, suggesting there could be more incentives, more unfunded tax cuts.”

Reeves, a former economist at the Bank of England, said high interest rates are worsening households’ cost of living.

“The prime minister and the chancellor are like two gamblers chasing losses at the casino . . . they don’t gamble with their money, they gamble with all our money,” he said.

Labor promised to reverse some of Friday’s mini-Budget National Insurance, corporate tax and abolition of the 45p rate cut, but would keep the looming cut in basic income tax from 20p to 19p.

Additional reporting by Adam Samson in New York and Leo Lewis in Tokyo

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