After a weekend where the markets digested the Kwasi Kwarteng plan for growth, the pound hit $1.03 in early trading in Asia – the lowest rate since the dollar was invented in 1792. The fall was shortlived – it later rebounded to $1.07 – but the fact that it touched such a low at all has set off speculation that the Bank of England will stage an emergency intervention putting up interest rates by as much as one percentage point.
‘We’ve entered the part of the currency crisis where psychology takes over. That could mean the markets continue to test the Bank and the pound falls further, suggesting that the Bank has to have another go to assert its authority,’ said Paul Dales, Chief UK Economist at Capital Economics. Its actions, he says, could involve interest rate rising to 3.75 per cent imminently. ‘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 government does it will ensure that inflation returns to 2 per cent.
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