Former Bank of England Monetary Policy Committee member Adam Posen also expects rates to go up, after a possible, futile attempt by the Treasury to intervene in forex markets to prop up the pound. “But I would expect — and encourage — the Governor/MPC to say publicly by mid-week that if GBP down, rates up,” he tweeted.
Markets have significantly ratcheted up their interest-rate hike expectations and now expect rates to rise by 1.5 percentage points by November this year and peak at 6.25 percent by November next year. Some bets are in for a first hike as soon as Monday.
The Bank of England on Thursday raised rates by 50 basis points to 2.25 percent and made explicit reference to a pending announcement that would likely “contain news that was material for the economic outlook.”
A falling pound is a particular concern for the Bank of England, as it challenges its fight against rampant inflation by boosting the cost of dollar-denominated energy imports. The lower the pound, the more interest rates have to rise.
In an interview with the Financial Times over the weekend, Kwarteng dismissed concerns over the ensuing market turmoil. “Markets move all the time. It’s very important to keep calm and focus on the longer-term strategy,” he said. Nor did he see a conflict between the Bank of England’s tightening of monetary policy to control rampant inflation and the fiscal authority’s spending spree.
Shadow Chancellor Rachel Reeves, in contrast, told BBC Radio’s Today program that the drop in the pound is “incredibly concerning,” as it will push up consumer prices as well as the government’s borrowing costs.
