Pound comes under new pressure after Bank of England fails to raise rates

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Sterling came under fresh, heavy pressure on the world’s financial markets after the Bank of England 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.

The Bank raised interest rates by a half a percentage point to 2.25% the day before Kwasi Kwarteng’s mini-budget on Friday and is nervous about inflicting too much pain on an economy it already considers to be in recession.

But markets now believe that official borrowing costs will need to rise to 5% to reverse sterling’s slide – a squeeze that would wipe out any boost from the chancellor’s growth push and lead to soaring mortgage rates for millions of homeowners.

Kwarteng also failed to reassure jittery markets with a promise that he would outline the government’s debt-reduction strategy in a statement at the end of November.

The chancellor said the Treasury would not be announcing fresh plans for departmental spending even though rising inflation means money allocated across Whitehall a year ago now buys less.

Paul Dales, the chief UK economist at Capital Economics, said: “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.”

In a statement, the Bank said: “As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, 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.”

Markets have become increasingly concerned about the prospects for the UK economy since the government announced plans on Friday to cut taxes by the largest amount in 50 years.

Gilt yields – the cost the government pays for its borrowing – also soared to a 12-year high. Interest rates on 10-year government debt stood at 4.2% – up from 3.5% ahead of Kwarteng’s statement last week.