Interest rates

Bank ‘won’t hesitate’ to raise interest rates after pound falls

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The Bank of England said it would “not hesitate” to raise interest rates to curb inflation after the pound fell to a record low against the US dollar.

The Bank said it was “monitoring developments closely” and would make a decision on any action in November.

His statement came after the Treasury announced it would release a debt relief plan in a bid to reassure investors.

The pound fell again after the two statements and some UK lenders said they were ending new mortgage deals.

Halifax, the UK’s biggest mortgage lender, said it would temporarily withdraw all fee-based mortgage products due to market volatility.

Virgin Money and Skipton Building Society also stopped offering mortgage products to new customers.

Experts said a rise in the cost of long-term borrowing due to market turmoil meant the cost to lenders of providing new mortgage deals was too high.

Sterling fell to an earlier all-time low against the US dollar after Chancellor Kwasi Kwarteng promised further tax cuts this weekend on top of Friday’s mini budget, where he announced the biggest tax cuts in 50 years.

The pound had fallen as global markets reacted to the sharp increase in government borrowing needed to fund the cuts.

A weak pound makes it more expensive to buy imported goods and risks pushing up the 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 pace in 40 years.

Some economists had predicted that the Bank of England would call an emergency meeting in the coming days to raise interest rates in a bid to stem the slide, as well as calm rising prices.

But the Bank of England instead said it was “monitoring developments in the financial markets very closely” and would make a full assessment at its next meeting on November 3.

Investors now expect interest rates could more than double by next spring to 5.8% from 2.25% currently, to rein in high inflation, which is expected to be fueled by huge government cuts. taxes announced in Friday’s mini-budget.

“Not affordable”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said if interest rates rise as expected, the average household who would refinance a two-year fixed-rate mortgage in the first half of the year next would see his monthly payments drop from £863 to £1,490.

“Many simply won’t be able to afford it,” he said.

Analysis Box by Chris Mason, Political Editor

Analysis Box by Chris Mason, Political Editor

A double dose of attempted reinsurance in the late afternoon – first from the Treasury, then from the Bank of England.

What’s New Treasury is a timeline with dates attached. There will be a series of statements from various cabinet ministers on ideas we heard about on Friday.

And then in just under two months, a parliamentary moment. What is described as the “medium-term budget plan” – and the calculations of the Office of Budget Responsibility.

In short, what the Treasury is trying to say is this: don’t panic, we know what we are doing.

Well, let’s see what the markets do next.

Market volatility following Mr Kwarteng’s mini-budget has also been linked in part to the government’s decision not to release a forecast of expected UK growth and government borrowing from the independent forecaster Office for Budget Responsibility.

Martin Weale, professor of economics at King’s College London and a former member of the Bank of England’s monetary policy committee, which votes on interest rates, told BBC Radio 4’s PM program that people “fear the government has no plan to reduce the national debt.” under control.”

“The pound fell because market traders were spooked by government policies, and I think they were spooked even more by the feeling over the weekend that this was just the first payout. certain tax reductions.

But Lord David Frost, a Tory peer and former chief Brexit negotiator, said the reaction in global markets was “an overreaction”.

“I don’t think anything went wrong, in fact Liz Truss promised change, a different economic approach to get us back to growth and out of stagnation.”

He said that as part of this change in approach, interest rates would rise and the government would have to provide additional support via tax cuts and even if it would have to cut spending in the medium term, the details of that would come in November.

The government said its fiscal plan set for Nov. 23 would include full growth and borrowing forecasts from the Office for Budget Responsibility.

He also pledged to provide further details on the government’s spending rules, including how it will attempt to reduce debt.

Paul Dales, chief UK economist at Capital Economics, said that given that the pound had fallen since the Bank and Treasury statements, markets “may well need more reassurance and a real action,” saying a change in government policy or an interest rate hike by the Bank at an emergency meeting before Nov. 3 may be needed.