Yesterday, as worries rose over the effect of Liz Truss’s £100 billion or more cost of living plan on Britain’s debt, the pound hit a 37-year low versus the dollar.
The US dollar continued to rise against other currencies, including the Japanese yen, while sterling fell.
The value of the pound plunged, causing it to reach its lowest point since 1985, when Margaret Thatcher was in office.
Even if there are still concerns about a recession, the Bank of England yesterday issued a warning that it may raise interest rates in the coming weeks.
Even though it would have “hard” repercussions, Governor Andrew Bailey told MPs that the Bank needs to maintain a lid on rising inflation.
The Bank has been increasing rates in an attempt to curb inflation, but a weak pound will make imports more expensive, leading to more price increases.
Yesterday, the value of the pound dropped to $1.14, which is lower than it was in March 2020, when Covid lockdowns started to shut down significant portions of the economy.
Yesterday, the value of the pound dropped to as low as $1.14, which is lower than it was in March 2020, when Covid lockdowns started to shut down significant portions of the economy.
It fell against the euro as well, reaching a low of 1.15 euros.
By the middle of next year, according to economic analysts, it will only be worth $1.05. This is because they anticipate that the UK will experience a recession while the US will not.
The vigorous measures taken by the American central bank to combat inflation with sharp interest rate increases have helped to support the dollar while the value of the pound has fallen.
Yesterday’s positive US economic figures supported the greenback, which also reached a 24-year high against the yen.
It implies that when its monetary policy committee (MPC) meets the following week, the Bank of England could be compelled to raise interest rates.
Governor Andrew Bailey told MPs the Bank needed to keep a lid on rampant inflation even though it could mean ‘hard’ consequences
The Chancellor vowed yesterday to ensure the economy grows faster than the nation’s debts with a plan to cut taxes
Mr Bailey yesterday told MPs that the MPC could put up rates by as much as 0.75 percentage points, squeezing beleaguered borrowers.
Consumers and businesses have already been hit by a succession of hikes since late last year, but Mr Bailey insisted the country must face rate hikes in order to try to reach its 2 per cent target.
He told MPs ‘the most likely outcome’ was a recession in the UK, and admitted there was little the Bank could do to stop the downturn given the ‘huge effect’ of the Ukraine war, which has sent energy prices spiralling.
The governor insisted that the blame for the UK’s looming downturn lies with ‘Vladimir Putin, not the MPC’.
‘There will be a recession but the main cause of that is the war and the effect on real incomes and the effect on demand,’ Mr Bailey told MPs on the Commons Treasury committee.
He denied that the Bank of England had ‘failed’ by not containing inflation, after questions were raised about its role during the Tory leadership campaign.
He said that in the 25 years since it was given independence, until recent months inflation had on average met the Bank’s 2 per cent target.
Mr Bailey also brushed off the idea that market turmoil was connected to fears about the affordability of Liz Truss’s cost of living package.
Instead he welcomed the package announcement, saying the measures would make the direction of policy clearer.
Bank of England chief economist Huw Pill, also appearing before the MPs, said forecasts that UK inflation could have reached 22 per cent next year had been ‘plausible’.
But he joined other experts in predicting that Miss Truss’s plans for an energy price freeze meant it would not reach such a high level.
He said that the policy ‘in the short term will tend to weigh on inflation’.