Sterling hits historic low to drive expectations for large UK interest rate hikes

Bank of America said British economic policy was 'toxic' and helping drive sterling into a crisis

Chancellor of the Exchequer Kwasi Kwarteng: To publish a medium-term fiscal plan on November 23

Bank of England governor Andrew Bailey said on Monday the bank "will not hesitate" to raise interest rates if needed to meet its 2% inflation target, and that it was watching financial markets "very closely" following sharp moves in asset prices.

Sterling fell to a record low against the dollar at one stage on Monday, extending losses that had accelerated on Friday after chancellor Kwasi Kwarteng gave his first fiscal statement, promising big tax cuts.

"The bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets," Mr Bailey said in a statement.

"The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit," he added.

Shortly before the Bank of England statement, Mr Kwarteng said he would publish a medium-term fiscal plan on November 23, and the UK's Office for Budget Responsibility would publish updated growth and borrowing forecasts.

"I welcome the government's commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances," Mr Bailey said. 

The wild market swings are a response to sweeping tax cuts announced on Friday that investors fear will fuel inflation and increase borrowing at a time of rapidly rising interest rates.

The central bank also appeared to quash speculation about an emergency move, saying it will make a “full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, and act accordingly”. 

Sterling fell after the statement and was down at $1.066. 

Bank of America said the British economic policy was "toxic" and pushing the currency "towards existential crisis". 

The research, published before the statement from the Bank of England, said the bank may need to hike British interest rates significantly in response to the fall in sterling. 

Lee Evans, head of British interest rate trading at Bank of Ireland, said bond markets were pricing in further Bank of England rare increases. The bank had last raised rates, by half a point, only last week.    

• Reuters, Irish Examiner and Bloomberg