Sterling plunged to a record low against the dollar today, leading to speculation that the Bank of England may be forced into an emergency interest rate increase.
The pound fell 4.7 per cent to $1.035 against the US currency in Asian trading, the lowest since the decimalisation of the currency in 1971. Sterling also fell as much as 3.7 per cent against the euro to €1.0787, reaching the lowest level since September 2020. The pound recovered somewhat in European trading to €1.1072, a 1.2 per cent fall from Friday’s close.
The UK’s cost of borrowing surged as investors worried about the massive amounts of government debt that would be required to finance the tax cuts and spending pledges unveiled on Friday by new UK chancellor Kwasi Kwarteng.
The yield on 10-year gilts, which move in the opposite direction to the price of the financial instrument, surged 0.24 percentage points to 4.1 per cent while the yield on two-year gilts, which are more sensitive to monetary policy, rose 0.3 percentage points to reach 4.3 per cent.
Kwarteng on Friday unveiled a £45bn debt-financed tax-cutting package, the biggest fiscal stimulus for half a century, triggering a sharp sell-off of the pound and a surge in UK borrowing costs.
Despite the severely negative response from financial markets to the statement, the chancellor yesterday vowed to double down on his risky policy.
The next interest-rate-setting meeting of the BoE, which has a 2 per cent inflation target, is not scheduled until November. But some economists today called for emergency intervention by the UK central bank to restore confidence in the pound.
Paul Dales, chief UK economist at Capital Economics, said: “By bringing forward a lot of the policy tightening that might be needed to have happened anyway, the bank would demonstrate in no uncertain terms that whatever the [UK] government does it will ensure that inflation returns to 2 per cent.”
He added: “This would go a long way to easing the crisis.”
“The UK is now in the midst of a currency crisis,” said Vasileios Gkionakis, Citigroup’s head of foreign exchange strategy.
Traders ramped up bets on an emergency interest rate rise before the BoE’s meeting in November. Derivatives markets are pricing in a rise of more than 0.5 percentage points in a week’s time and an increase of nearly 1.5 percentage points by the November meeting.
Analysis: Kwasi Kwarteng invoked the spirit of Margaret Thatcher when unveiling his go-for-growth budget, write Chris Giles and Delphine Strauss. But, they say, the more accurate historical comparisons are with Anthony Barber’s ill-fated 1972 budget and Reaganomics.
Opinion: Toby Nangle, head of asset allocation at fund manager Columbia Threadneedle Investments, says it is hard to overstate how poorly Kwarteng’s announcement has been received by financial markets.
Does the fall in the pound affect you? Do you think the tax cuts and spending pledges unveiled by the UK government on Friday will spur growth? Email me at firstname.lastname@example.org.
Here is the rest of today’s news — Gordon
Five more stories in the news
1. Far right storms to victory in Italian election Giorgia Meloni is poised to become Italy’s first female prime minister since Italian unification in 1861 after her far right Brothers of Italy party emerged with the biggest number of votes in yesterday’s general election. She will form a governing alliance with Matteo Salvini’s nationalist League and former prime minister Silvio Berlusconi’s Forza Italia.
Go deeper: Rome correspondent Amy Kazmin recently wrote this profile of Italy’s new prime minister.
2. Western allies boost nuclear deterrence Several countries are making contingency plans in case Russian president Vladimir Putin acts on his threats of nuclear attacks against Ukraine, sending private warnings to the Kremlin about possible consequences, according to western officials. Putin’s nuclear warnings are “a matter that we have to take deadly seriously”, US national security adviser Jake Sullivan told CBS yesterday.
Trouble at home: Protests against Putin’s mobilisation of hundreds of thousands of reserve soldiers spread across Russia at the weekend.
3. UAE agrees LNG deal with Germany The United Arab Emirates has agreed a deal to supply liquefied natural gas to Germany as Chancellor Olaf Scholz visited the Gulf state as part of a regional tour seeking to drum up alternatives to Russian energy. The supplies will be the first delivered to a new import terminal on Germany’s northern coast.
4. Investors pile into insurance Investors are buying record amounts of insurance contracts to protect themselves from a sell-off that has wiped trillions of dollars off the value of US stocks this year. Purchases of put option contracts on stocks and exchange traded funds surged to $9.6bn in the past week alone.
5. Interpol issues red notice for Terraform Labs co-founder Interpol is looking for Do Kwon, the co-founder of collapsed cryptocurrency operator Terraform Labs, who is on the run and refusing to co-operate with South Korean authorities over the $40bn implosion of the terraUSD and luna tokens. Law enforcement officers in South Korea said today that agencies worldwide will now co-operate to locate and arrest Kwon.
The day ahead
Market outlook US equity markets are expected to open lower later today after shedding 5 per cent last week as central banks raised interest rates to control surging inflation, spooking investors. Europe’s Stoxx 600, which ended in “bear territory” on Friday, fell 0.3 per cent this morning.
Monetary policy Several officials across the Federal Reserve’s network are scheduled to speak today, marking some of the first remarks from policymakers following the US central bank’s decision last week to raise interest rates by 0.75 percentage points for the third time in a row.
Economic data Among the most closely followed economic data from Latin American countries today are July economic activity figures for Mexico and Argentina as well as July current account numbers from Brazil.
Elon Musk The Tesla co-founder is set to be questioned in Delaware by lawyers for Twitter as the two sides prepare for October’s trial over the billionaire’s efforts to walk away from his $44bn takeover of the social media group. According to a court filing from last week, the deposition could stretch into Wednesday if needed.
Nasa’s Dart mission The US space agency will deliberately crash a spacecraft into an asteroid at 23,000kph in order to divert its path. The $300mn double asteroid redirection test has picked the asteroid Dimorphos as its target because it orbits another asteroid rather than the sun.
Keep up with the important business, economic and political stories in the coming days with the FT’s Week Ahead. Click to subscribe here. And don’t miss our FT News Briefing audio show — a short daily rundown of the top global stories.
What else we’re reading
How abortion rights are upending the US midterms The Supreme Court’s decision to strike down the half-century Roe vs Wade legal precedent, rescinding the constitutional right to terminate a pregnancy, is energising Democrats and unsettling Republicans ahead of November’s midterm elections.
Brazil’s election and the search for an economic revival Brazil’s ascendancy in the early years of the 21st century as an emerging market darling — the B in Brics — ended with a thud in 2014. Since then living standards have stagnated, and as voters prepare to go to the polls on October 2 it is how to revive the economy that is uppermost in their minds.
The seven economic wonders of a worried world In periods of economic gloom, it is worth highlighting the few countries that defy the prevailing pessimism. Ruchir Sharma outlines seven that stand out in a world tipping towards recession.
Men who get their legs broken to gain height are not entirely mad Study after study shows that it pays to be taller than average, especially for men. Does that explain the grisly new trend of leg lengthening? Pilita Clark has done some research of her own and has words of caution for anyone thinking of undergoing the procedure.
Talent wars: why businesses have to battle to hire the best From technology to hospitality, construction and life sciences, employers are experiencing a talent crunch. The rise of remote working has had a knock-on impact on “deskless” workers, with potentially dire consequences for some other industries. Anjli Raval reports on the climate facing hiring managers.
HTSI published its autumn 2022 arts special this weekend. Highlights included how artists in Ukraine are responding to the war, an interview with one of Broadway’s youngest producers and an appreciation of artists’ muses.