Connect with us

Hi, what are you looking for?

Business

Pressure on Kwasi Kwarteng as sterling slide continues

Pressure on Kwasi Kwarteng as sterling slide continues

The official line from government is no comment on market movements. The baptism of fire for the chancellor after his budgetary statement continued in the early hours of Monday morning, with the pound hitting further 37-year lows in early Asian trade, and then plummeting to all-time lows against the dollar, below $1.04 in early market trade.

Whatever is said in public, behind the scenes, the government will be deeply concerned waking up to record lows, as well as the surge in UK government borrowing costs, in particular.

Borrowing costs reached their highest levels since August 2008 on Monday morning. The effective rate of interest on borrowing for two-year and five-year periods reached 4.5%.

The moves reflect a combination of Britain being charged more for larger borrowings and the Bank of England now predicted to raise interest rates much more aggressively.

These rates will effectively be passed on to household and commercial borrowers of fixed-term loans. While the injection of cash from tax cuts should help temper the recession, very fast rate rises could make that worse.

It is an unusual and concerning sign that these borrowing costs are going up at the same time as the value of sterling has fallen sharply.

Sterling fell significantly versus the dollar on Friday and again on Monday morning. Some financial markets indicate a one-in-four chance of one pound being worth less than a dollar. It is effectively the lowest value for sterling against the dollar in the history of the US currency.

The last time the value of the pound was anywhere near $1.05 was in February 1985. Back then, the official line from Downing Street was also that the government was unworried by a slide in the pound, and that it was mainly the result of a strong dollar and speculation.

In private, official papers from that time, reveal that Mrs Thatcher was seeking answers from President Reagan, and imploring the Treasury to set a trap for those speculating against the pound. Eventually the Bank of England raised interest rates to protect the value of sterling.

While the dollar has been very strong as its central bank the Federal Reserve has hiked interest rates aggressively, sterling has also been weak against other major currencies such as the euro. Some economists and traders anticipate the government or Bank of England could have to intervene in some form to shore up confidence.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like