By William Watts
Investors and traders appeared to shrug Monday after the Bank of England said it was prepared to raise rates as much as necessary to meet its inflation target following a second day of financial market chaos following the U.K. government’s tax-cutting plan.
In a statement released after U.K. markets closed, Bank of England Gov. Andrew Bailey said the institution is “monitoring developments in financial markets very closely.”
Bailey said the BOE’s Monetary Policy Committee, or MPC, has made clear it will make a full assessment at its next meeting of the impact on demand and inflation from the government’s announcements and the fall in the pound, and act accordingly. “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,” Bailey said.
The British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.5476% plunged Friday and extended its drop early Monday, with sterling sliding to a record low below $1.04 to the U.S. dollar in Asian trading hours. The pound bounced off the early lows in European and U.S. trading hours, but slipped versus the dollar and other rivals after the BOE announcement, which analysts deemed disappointing.
The pound was off 1.3% at $1.0678 after trading above $1.07 ahead of Bailey’s announcement.
“The FX world is starting to doubt that BOE is acting independent and that could keep the pressure on cable,” said Edward Moya, analyst at Oanda, in a note.
The yield on the 10-year gilt /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y +2.55% had surged over 30 basis points 4.13% ahead of the BOE announcement, rising to nearly 4.28%. Yields and bond prices move opposite each other.
Bailey acknowledged the U.K. Treasury’s unveiling Friday of its budget plan and further details released Monday. Large tax cuts were blamed by analysts and traders for a sharp selloff in the pound. In his statement, Bailey said he welcomed 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.”
Financial markets “have lost confidence in the U.K.’s macro policy regime, so households and most businesses are set to endure a big squeeze on their real disposable incomes and profits, regardless of how the government and BOE respond,” wrote economists Samuel Tombs and Gabriella Dickens, in a note.