Bank of England avoids intervening in pound slump

The pound on Monday plunged to its lowest level yet against the dollar after the government's tax cut plan

The Bank of England declined to act to stop the UK's currency falling further. Reuters
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The Bank of England on Monday declined to step in and increase interest rates to shore up the battered British pound, after investors were spooked by the new government's economic plans.

The Bank said it was monitoring developments closely after sterling fell to an all-time low of below $1.04 on Monday, before rallying in afternoon trading.

However, it said it would not hesitate to change interest rates to control inflation. It said it would fully assess the government's economic plans at its next scheduled meeting in November.

"The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term," the Bank's governor Andrew Bailey said.

Despite speculation about an immediate intervention, there was no change to interest rates after they were raised to 2.25 per cent last week. A mini-budget the following day by Chancellor of the Exchequer Kwasi Kwarteng sent markets into freefall after he announced a raft of tax cuts funded by borrowing.

Mr Kwarteng will set out a medium-term fiscal plan on November 23, the Treasury confirmed on Monday.

The pound on Monday plunged to its lowest level yet against the dollar, falling almost 5 per cent at one point to $1.0327, its lowest since Britain went decimal in 1971. It regained ground later, rising above $1.09 by almost 2pm UK time, which was higher than it was at the beginning of the day.

The currency, which has been falling against the greenback for months, fell dramatically on Friday after the government announced a radical plan to spur economic growth through the country’s biggest tax cuts in 50 years.

Under the plan, which was widely criticised, the government will abolish the cap on bankers' bonuses and the top 45 per cent rate of tax for the biggest earners. Thresholds for paying stamp duty were also increased, while a national insurance increase introduced by Boris Johnson’s government will be reversed from November 6.

The pound continued its freefall after markets opened on Monday after the chancellor, Kwasi Kwarteng, hinted at the weekend that the tax-cut plan was only the start of more to come.

“We have only been here for 19 days. I want to see, over the next year, people retain more of their money,” he told BBC One’s Sunday with Laura Kuenssberg programme.

The pound has lost more than 20 per cent of its value against the dollar since the start of the year.

"Sterling is getting absolutely pounded [and] looks like an emerging market currency, especially when you look at the price of the British pound a few months ago and compare it to where it is now," said Naeem Aslam, chief market analyst at AvaTrade. He said that the currency could hit parity with the US dollar this week.

Updated: September 26, 2022, 4:06 PM