Government moves to calm markets as pound falls to lowest level against dollar since 1985

New chancellor on charm offensive in Square Mile says Bank of England independence ‘is sacrosanct’

The government has moved to quash City speculation that Liz Truss is set to interfere with the political independence of the Bank of England, amid a currency depreciation in which the pound hit the lowest level against the dollar since 1985.

In a charm offensive in the Square Mile as sterling came under renewed selling pressure on Wednesday, the new chancellor, Kwasi Kwarteng, used his first full day in the job to try to calm jittery financial markets amid growing concerns over the new prime minister’s economic policy.

Meeting with top City bank bosses and investors, as well as the Bank’s governor, Andrew Bailey, he insisted that Threadneedle Street’s independence from government was “sacrosanct” in the fight against soaring living costs.

Good meeting with the Governor of the Bank of England, Andrew Bailey.

The Bank’s independence is sacrosanct as we work together to overcome cost of living challenges.

I’ve reinstated regular meetings with the Governor - initially bi-weekly - to coordinate our ongoing response.

— Kwasi Kwarteng (@KwasiKwarteng) September 7, 2022

The Treasury said Kwarteng met Bailey to “emphasise his full support for the Bank’s mission to get inflation under control”.

The comments came as sterling staged a renewed fall against the dollar, skidding by as much as 1% to $1.1406 at one stage to touch the lowest level in 37 years. Although the dollar has risen against other currencies in recent weeks, experts say Britain has been singled out for being particularly exposed to rampant inflation and a looming recession.

The prospect of political interference at the central bank – after Truss promised a review of its mandate in her leadership campaign – as well as the new prime minister driving up public borrowing through unfunded tax and spending plans has also weighed on UK assets.

“It is hard to avoid the conclusion that a UK sovereign risk premium has been going into the pound,” analysts at the Dutch bank ING said. “[That is] presumably on doubts about at what price investors would be prepared to fund future UK borrowing plans.”

The latest drop in sterling came as Bailey defended the Bank’s record of managing inflation, amid speculation that Truss could remove him as governor earlier than planned.

Analysts at Goldman Sachs warned of “potential personnel changes” in a review of the Bank’s mandate expected this autumn, speculating that Bailey’s eight-year term could be halved – meaning a new appointment in March 2024.

“We do not expect PM Truss to remove governor Bailey from his post, but his term could be reduced to four years from the current eight-year appointment,” the US investment bank said. Threadneedle Street and government sources dismissed the suggestion, saying the governor’s eight-year term was fixed.

Speaking to MPs on the Commons Treasury committee, Bailey said a review would be welcomed as a “sensible and good thing to do”, but that Russia’s invasion of Ukraine was responsible for the huge inflation shock hitting Britain and had left the central bank with limited tools in response.

“The person who is going to put this economy into recession is Vladimir Putin, not the MPC [Monetary Policy Committee],” he said. “By far the largest contribution to this [inflation shock] is the war. That’s not something that is, I’m afraid, within the remit of monetary policy.”

The governor suggested that Truss clarifying her economic plans this week might help clear some of the storm clouds over Britain in financial markets, saying: “I do very much welcome the fact that there will be, as I understand it, announcements this week, because I think that will help to, in a sense, frame policy and that’s important.”

With the annual rise in the cost of living now at five times the Bank’s 2% target, Bailey dismissed suggestions that the inflation-targeting regime used since Gordon Brown gave the Bank independence to set interest rates 25 years ago was no longer fit for purpose.

He said: “This is by far the biggest shock we are facing during the life of that, but it does not suggest that the regime has failed. What it suggests is that the regime now has to do its work and respond to a much bigger shock and we are confident that it will do so.”

Last month the Bank forecast inflation above 13% this year, with a lengthy recession as a consequence of soaring household energy bills hitting consumer spending power. Truss is widely expected to cap prices in an emergency support package on Thursday, which economists expect to reduce inflation and lessen the impact of any contraction.

Bailey replaced Mark Carney as governor in March 2020 at the onset of the Covid pandemic, on a term that runs to March 2028, despite speculation that he was not Boris Johnson’s favoured candidate for the role. The then prime minister was thought to want Gerard Lyons, a prominent Brexit backer and his economic adviser while mayor of London, but was warned against the appointment by the Treasury. Lyons has advised Truss during her leadership campaign.

Efforts to intervene at Threadneedle Street were also thrown into sharp relief on Wednesday when the new City minister, Richard Fuller, revealed that the government was planning to give itself powers to override City regulators, including the Bank.

“[The intention is] to bring forward an intervention power that would enable Her Majesty’s Treasury’s to direct a regulator to make, amend or revoke rules where there are matters of significant public interest,” Fuller told MPs. The change would form part of amendments to the financial services and markets bill, which is aimed to repeal a raft of EU laws.


Richard Partington and Kalyeena Makortoff

The GuardianTramp

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