Sterling slides back towards record low as Bank of England and Treasury fail to reassure markets – as it happened

It’s been a wild day in the financial markets, with the pound sinking to an alltime low as investors lost confidence in the UK’s public finances following last Friday’s mini-budget.

And sterling is under more pressure tonight, as our economics editor Larry Elliott reports:

Sterling came under fresh, heavy pressure on the world’s financial markets after the Bank of England appeared to ruled out an emergency rise in interest rates to defend the struggling UK currency.

Sterling lost two cents against the US dollar after investors were left unimpressed by Threadneedle Street’s decision to adopt a wait-and-see approach rather than act immediately.

The pound hit a record low against the greenback in Far East trading overnight but had recovered as the markets anticipated action from the Bank’s nine-strong monetary policy committee (MPC).

However, the attempt by the Bank’s governor, Andrew Bailey, to play for time left the pound once again looking vulnerable to selling pressure and within minutes of the Bank’s statement it was trading within three cents of its all-time low of just above $1.03.

Here’s the full story:

Kwasi Kwarteng’s fiscal event is looking like an ever-more-serious serious blunder, after sterling reeled to just $1.0327 in Asia-Pacific markets, a new alltime low.

Market confidence in the UK has been badly hit, on fears that Britain’s twin deficits – the budget, and the current account – will both widen alarmingly.

UK government bonds have been hit by a shocking selloff, driving up the cost of short-term borrowing to the highest level since 2008.

Analysts at Nomura warned that the pound will hit parity by the end of November, end the year weaker, and fall further below parity in 2023.

The Treasury and the Bank of England have attempted to reassure markets tonight, with the central bank insisting it ‘won’t hesitate’ to act if needed, and the government pledging to outline how it will bring down the UK’s debts over time.

But investors aren’t impressed, concerned that the Treasury’s plans won’t come until late November.

If a week is a long time in politics, a month is an eternity in a sterling crisis, and some economists are predicting more action will be needed soon.

Top investors and economists had urged the bank to consider an emergency rate hike, perhaps a whole percentage point, to prop up sterling.

Paul Donovan, chief economist of UBS Global Wealth Management, said that investors “seem inclined to regard the UK Conservative Party as a doomsday cult” – a sign of how much damage has been caused.

Despite the Bank’s lack of action, the money markets are still anticipating that Bank Rate will be hiked dramatically, to around 6% by next summer.

That could caused a housing crash, experts warned today, and would also mean a deeper recession and more companies going bust.

And in another worrying development, some mortgage brokers have been forced to temporarily pull offers from the markets, due to volatility and uncertainty.

The crisis is causing global interest, with one US central banker warning tonight that it could hurt the US and European economies.

And Labour are demanding an inquiry into whether hedge funds used inside information to profit from the mini-budget, by shorting sterling or gilts.

Goodnight, We’ll be back tomorrow with the latest developments…

The slump in the pound is going to have major repercussions for UK businesses.

A craft brewer in Peterborough and a Birmingham metal stamping firm have told us how the coost of their raw materials and parts imported from abroad will rise.. while imports are more competitive.

Oakham Ales was one of the first UK brewers to source hops from America, seeking bolder, punchier flavours.

It proved a wise decision, catching the zeitgeist as consumer tastes changed. Citra is now a common ingredient in the mash tuns of Britain’s craft brewers and Oakham’s own award-winning Citra ale is sold in supermarkets such as Tesco and Morrisons.

The fall in value of sterling poses a threat to that success story.

“It’s a proprietary hop, which means we have to buy direct from one of the big American hop companies,” said Oakham’s spokesperson, Nick Jones.

“There’s no option on that, we have to buy in dollars, so obviously the pound plunging is a big problem for us.

For businesses whose exports are more valuable than their imports, it is a different story. The metal stamping company Brandauer, which turned 160 years old in March, sends products such as razor blades and components for electrical devices like kettles all over the world.

“At the minute, it’s upside for us,” said the the Brandauer chief executive, Rowan Crozier.

“It’s quite a good opportunity for us at the moment.

Here’s the full piece, by my colleagues Rob Davies and Jasper Jolly

Concerns over Britain’s sterling and gilts crisis are going global.

Raphael Bostic, the president of the Atlanta Federal Reserve, has warned that the sell-off in the pound following the mini-budget reflect rising uncertainty about the direction of the country’s economy.

They could lead to greater economic stress in Europe and the United States, Bostic warned.

“The reaction to the proposed plan is a real concern and a fear that the new actions will add uncertainty to the economy,” Bostic said in a webcast interview with the Washington Post, adding:

“The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform.”

“These are just proposals, and we haven’t actually seen what’s going to play out.

Former Treasury permanent secretary Nick Macpherson warns that the markets now have sterling, and government bonds ‘in their sights’.

He fears that we haven’t seen the bottom of the market crisis yet….

Today’s statements from the Bank of England (here) and the Treasury (here) can at best be described as “too little, too late”.

So says Alastair George, Chief Investment Strategist at Edison Group.

George expalins that the government have triggered a sterling crisis – and resolving it will cause serious economic pain.

George explains:

The pro-cyclical mini-budget is seen as counter-intuitive to international investors in the UK who must be wondering if politicians understand the ramifications of policies which have triggered a meaningful sterling crisis.

“Gilt yields and interest rate futures have jumped 1% since only Friday as traders expect the Bank of England to ultimately be forced to act to defend the currency - and at the expense of braking the domestic economy hard.

We fear this is will not be an easy situation to stabilise – monetary policymakers need to act decisively head off speculative attacks on the currency, separately from the relative merits or otherwise of the recently announced fiscal measures.”

The pound has now slipped back to $1.065, down two cents today, on top of the four cent plunge on Friday.

That’s till three cents above its record low overnight… but only one a cent above the previous all-time low for sterling, of $1.0545 set in 1985.

The volatility in the financial markets is forcing some mortgage producers to temporarily suspend their products, Reuters reports.

British lenders Virgin Money and Skipton Building Society temporarily withdrew their mortgage ranges for new customers on Monday because of the volatility in sterling funding markets, according to emails sent to brokers.

“Following a number of changes in the market, we have made the decision to temporarily withdraw all our products for new customers at 8pm tonight,” Virgin Money said in its email to brokers, seen by Reuters.

“We continue to monitor the situation closely and currently plan to relaunch products for new customers towards the end of the week.”

Earlier today, lender Halifax said it had temporarily withdrawn from the market all of its mortgage products that come with a fee, in response to turmoil in British funding markets.

A Halifax spokesperson said in a statement.

“As a result of significant changes in the cost of funding, we’re making some changes to our product range.”

Halifax, part of Lloyds Banking Group said there was no change to its product rates and that it continued to offer fee-free options at all product terms and loan-to-value levels.

UK government bond prices are tumbling even further, pushing up the yield (or interest rates) even higher.

The cost of borrowing for a decade has now hit 4.2%, from 3.5% in the middle of last week (before the mini-budget).

Another sign that the twin statements from the Treasury and the Bank of England have not immediately calmed the markets….

The FT’s Chris Giles isn’t impressed by the Bank’s statement:

The government and the Bank of England have done the ‘bare minimum’ this afternoon to reassure markets, says Paul Dales of Capital Economics.

It remains to be seen whether today’s statement by the government and the Bank of England will be enough to ease the markets’ fears about the government’s fiscal policy, Dales warns, adding:

The initial reaction in the markets, with the pound falling again after it regained some ground, suggests that the issue may not be put to bed yet.

Either way, the end result will probably be interest rates rising sooner and further (perhaps from 2.25% to 5.00%) in the coming months.

This chart shows how the pound was unmoved by Kwasi Kwarteng’s pledge to outline his plans to achieve stable public finances in November, and then fell after the Bank of England did not announce an emergency rate hike.

Viraj Patel, foreign exchange & global macro strategist at Vanda Research, suspects the Bank of England may be bounced into taking action, if ‘something breaks’ in the markets this week.

Neil Wilson of Markets.com calls the Bank’s response to the sterling crisis ‘inadequate’.