Pound dips to 37-year low against dollar as City weighs Truss plan
...and Bank warns of more rate rises to come
THE pound fell to a 37-year low against the US dollar yesterday as investors weighed up the impact of Liz Truss’s £100billionplus cost of living plan.
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 inflation.
The value of sterling yesterday fell to $1.14, surpassing a low seen in 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.
‘Recession the most likely outcome’
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.
Mr Bailey yesterday told MPs that the MPC could put up rates by as much as 0.75 percentage points, squeezing beleaguered borrowers.
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.
Mr Bailey 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 that the main cause of that is the war and the effect on real incomes and the effect on demand,’ he told MPs on the Commons Treasury select 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 they 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’.