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BoE says watching markets ‘very closely’ after sterling tumble – Al Jazeera English IG News

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The Bank of England said it would not hesitate to change interest rates and is watching markets ‘very closely’ after the pound hit a record high and UK bond prices plunged in response to the budgetary plans of the new government. Do.

Finance Minister Kwasi Quarteng sent the pound and government bonds into a tailspin on Friday with a so-called mini-budget designed to grow the economy by funding tax cuts coupled with a massive hike public loans.

Such was the turmoil in the market on Monday, sparking speculation in financial markets that the BoE would make an emergency interest rate hike, as it hiked rates to 2.25% from 1.75% last week.

Instead, with the pound fragile and bond prices still falling, Quarteng issued a statement just before the UK stock market closed, saying it would prepare a medium-term debt reduction plan on November 23. . and forecasts from the Independent Office for Budget Accountability. Full scale of government borrowing.

The central bank on Monday hailed Quarteng’s “commitment to sustainable economic growth” and an independent survey of OBR growth and lending forecasts.

“The Bank is closely monitoring developments in financial markets in light of the significant revaluation of financial assets,” said Bank of England Governor Andrew Bailey.

“The MPC will not hesitate to change interest rates to sustainably bring inflation back towards the 2% target over the medium term, in line with its mandate.”

US Federal Reserve official Rafael Boustik said market moves could create more economic stress in Europe and the US, while analysts and investors said the government had done minimal work to reassure the markets.

“There is no reason to believe markets will give the government the benefit of the doubt ahead of Quasi Quarteng’s new financial plan,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“The market could force their hand and there could still be an emergency rate hike before the next BoE meeting,” he said, referring to the next policy announcement scheduled for Nov. 3.

restless day

The Treasury and central bank statements came at the end of a day of turmoil for Britain’s currency and debt.

As the pound fell 5% to $1.0327 against the dollar, it was the weakest on record in Asian trade, mitigating most of the day’s losses in European trade on hopes of a boost. an increase in emergency rates.

The statement at Monday’s close pushed the pound to a low of $1.0820 from $1.0645. The pound was trading at $1.0680 at 4:44 p.m. GMT, down 1.6% on the day.

Prime Minister Liz Truss has pledged to govern the UK economy through tax cuts and regulation [File: Pool/Getty Images/AFP]

In the market for British government bonds, or gilts, the pressure was even more intense, with five-year bond prices registering the largest joint daily decline since at least 1991, matching Friday’s historic plunge. eat.

The yield on the five-year gilt – the cost of new borrowing for the UK government in five years – hit its highest level since September 2008 at 4.603%, and rose a percentage point in the last two days of fellowship as Prime Minister Liz. The truce government has lost its credibility with investors.

“The response to the proposed plan is genuine concern and concern that the new actions will add uncertainty to the economy,” Atlanta Fed President Bostic told The Washington Post.

“The crucial question will be what this ultimately means for the weakening of the European economy, which is an important consideration for the performance of the US economy.”

As the market remained extremely volatile, UK lenders Halifax, Virgin Money and Skipton Building Society pulled mortgage products from the market.

Allianz chief economic adviser Mohamed El-Erian said earlier that the central bank would have no choice but to raise interest rates if the truce and the Quarteng did not back down.

“Not a little, 100 basis points, a full percentage point to try to stabilize the situation,” he told BBC radio.

Truss, Britain’s former foreign secretary, was elected prime minister earlier this month by a vote of 170,000 Conservative Party members – not the wider electorate – after an internal party rebellion that ousted Boris Johnson from power. .

He has widely promised to end sluggish real wage growth by promising his rivals a resumption of economic growth through tax cuts and deregulation, which marked his party’s 12 years in government. .

His pledge to end the so-called “Treasury conservatism” and move towards development marked a sea change in British financial policy, returning to the Thatcherite and Reaganomic principles of the 1980s.

“Markets go up and down,” a veteran Conservative Party source said on condition of anonymity. “We did something structural, short-term, that would have seismic and positive long-term benefits.”

Also underscoring how much investors have penalized UK assets, the difference in 10-year borrowing costs for the UK and German governments has become the largest since 1992, when the UK switched from the Exchange Rate Mechanism European. got out.

UK 10-year government bond prices are now on course for the biggest fall in any calendar month since at least 1957, according to a Reuters analysis of data from Refinitiv and the BoE.

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