Pound dips to 37-year low against dollar as City weighs Liz Truss’s cost of living plan and Bank of England warns of more rate rises to come

  • Sterling’s slump came as US currency continued to soar against other currencies
  • The plunging value of the pound meant it fell to its weakest level since 1985
  • It came as the Bank of England yesterday warned it may hike interest rates
  • Andrew Bailey told MPs the Bank needed to keep a lid on rampant inflation 

The pound fell to a 37-year low against the dollar yesterday as concerns grew over the impact of Liz Truss’s £100billion-plus cost of living plan on Britain’s debt.

Sterling’s slump came as the US currency continued to soar against other currencies such as the Japanese yen.

The plunging value of the pound meant it fell to its weakest level since 1985 – when Margaret Thatcher was in power.

It came as the Bank of England yesterday warned it may hike interest rates in the coming weeks despite continuing recession fears.

Governor Andrew Bailey told MPs the Bank needed to keep a lid on rampant inflation even though it could mean ‘hard’ consequences.

The Bank has been raising rates in an effort to calm inflation but a struggling pound will increase the cost of imports, fuelling further price rises.

The value of Sterling yesterday fell to as low as $1.14, below even March 2020 when Covid lockdowns began shutting down large parts of the economy

The value of Sterling yesterday fell to as low as $1.14, below even March 2020 when Covid lockdowns began shutting down large parts of the economy.

It was also down against the euro, dipping to as low as 1.15 euros.

Economic experts predict it will fall to as low as $1.05 by the middle of next year, on the expectation that the UK will enter a recession – but the US will avoid one. 

As the UK currency has weakened, the dollar has been buoyed by aggressive efforts by America’s central bank to fight inflation with steep interest-rate hikes.

Promising US economic data yesterday continued to strengthen the dollar, which also hit a 24-year high versus the yen.

It means the Bank of England could be forced to hike interest rates when its monetary policy committee (MPC) meets next week.

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.

Kwarteng pledge on cutting tax 

The Chancellor vowed yesterday to ensure the economy grows faster than the nation’s debts with a plan to cut taxes.

In a bid to reassure markets, Kwasi Kwarteng said the Government would pursue an ‘unashamedly pro-growth agenda’.

He held talks with market and City leaders yesterday, as well the governor of the Bank of England, Andrew Bailey.

In their meeting at the Treasury, Mr Kwarteng and Mr Bailey discussed soaring inflation and agreed that getting it under control quickly was central to tackling cost of living challenges.

The Chancellor also told the governor reforms that create the conditions for a high-growth economy can help to alleviate inflationary pressures.

And he said ‘independence [of the Bank of England] is really a cornerstone of how we see managing the economy’.

The pair would meet ‘biweekly to coordinate our response to the cost of living crisis’, he said.

Mr Kwarteng earlier told bank chiefs he wanted to make London the capital of global finance with plans for City deregulation.

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’.

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