Sterling hovered close to its weakest levels since 1985 on Thursday, reflecting the scale of the economic challenge facing the UK’s new prime minister Liz Truss as she prepares to unveil an emergency energy package.
Ms Truss is due to give details during Thursday of the state intervention to shield households and companies from soaring energy bills. Government insiders said the total gross cost over two winters could hit £150 billion (€172 billion).
The package will be funded by government borrowing, adding to demand in the economy at a time when inflation is above 10 per cent; bond markets are already nervous about rising interest rates.
Asked whether the level of government bond sales could become “indigestible” if the government were borrowing a lot, Bank of England governor Andrew Bailey said the bank did not intend to destabilise markets. “Our team keeps this under very close consideration,” he said.
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Huw Pill, Bank of England (BoE) chief economist, made it clear the bank would have to raise interest rates in light of higher medium-term inflationary pressure from the government’s actions, but he would not be drawn on how far rates needed to rise.
Markets took the BoE’s reluctance to be specific as a dovish sign and sold sterling.
The pound sank as low as $1.1406 on Wednesday, according to data from Bloomberg, lower than the aftermath of the Brexit vote of 2016 and exceeding the depths of March 2020 when global markets convulsed in response to the Covid-19 crisis. Sterling has fallen 15 per cent against the dollar this year.
After trimming its declines later in the session, sterling slipped lower during Thursday morning dealings — losing 0.3 per cent to trade at $1.149.
Against the euro, it was trading around 87 pence.
Chris Turner, global head of markets at ING, the investment bank, said concerns about the level of borrowing meant that “we do not think sterling is particularly cheap at these levels”.
Kwasi Kwarteng, the new UK chancellor, told leading City of London figures that he would impose fiscal discipline “over the medium term”.
Ms Truss’s emergency package will cap average household power bills at about £2,500 a year at an estimated cost of £90 billion over two years, with the business element costing perhaps £60bn. Higher wholesale gas prices would push the bill higher. — Copyright The Financial Times Limited 2022
