Run on the pound sparks speculation about emergency rate hikes

The pound’s plunge to record lows against the US dollar has sparked speculation that the Bank of England may be forced to raise interest rates in an emergency to stem the run on sterling.

Financial markets were buzzing with speculation that the bank might have to hike rates to 2.25% less than a week after the last button hit on a rate hike and ahead of its next scheduled meeting in November.

Market experts said the bank may need to hike rates by as much as a percentage point – to 3.25% – to shore up the falling pound as it moves towards parity with the US following the Chancellor’s mini-budget tax cut announcements -dollar is racing.

Failure to act would be willful failure

Former rate-setters at the bank also said the bank’s governor, Andrew Bailey, would face increasing pressure to act and may have to call an emergency meeting of its Monetary Policy Committee (MPC).

Neil Wilson, Chief Market Analyst at Markets.com said: “The central bank is in a tough spot and any intervention could be just a band-aid as the path of least resistance for the pound is lower; parity gravity.

“Not to act anyway would be willful omission.”

He said Mr Bailey’s tenure “will be remembered for this moment” but added that the governor must take a “considered approach” and also weigh the risk of a knee-jerk reaction that creates more panic in the markets.

He said: “If the BoE sat idly by and watch the pound crater, they would be just as guilty as (Kwasi) Kwarteng.

“But it could hope that sterling will correct itself and recover before it has to say or do anything: the gravity of parity makes that quite risky.”

The comments came as Sir John Gieve, former deputy governor of the Bank of England, said he would be worried if he were still in office as sterling is falling against the dollar.

He told BBC Radio 4’s Today programme: “I think I would be concerned.

“The Bank and indeed the Government have indicated that they will take their next decision and release forecasts in November and on this point there is concern that they may need to take action a little sooner.”

Former Bank policymaker Martin Weale warned last week that the new government’s economic plans would “end in tears” – with a run on the pound in a similar event to 1976.

Financial markets are currently pricing in a rate hike from 2.25% to 3.75% in November, implying a hike before the next meeting and at the scheduled November 3rd decision.

The bank has hiked rates seven times in a row to try to stem rising inflation, most recently last Thursday from 1.75% to 2.25% – the highest since December 2008.

The Bank of England declined to comment.

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Mike Fahey

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