Sterling slides back towards record low as Bank of England and Treasury fail to reassure markets – as it happened

Last modified: 06: 04 PM GMT+0

Bank of England says it ‘will not hesitate’ to change interest rate but appears to be trying to squash expectations of an emergency rise

Closing summary

It’s been a wild day in the financial markets, with the pound sinking to an alltime low as investors lost confidence in the UK’s public finances following last Friday’s mini-budget.

And sterling is under more pressure tonight, as our economics editor Larry Elliott reports:

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

Here’s the full story:

Kwasi Kwarteng’s fiscal event is looking like an ever-more-serious serious blunder, after sterling reeled to just $1.0327 in Asia-Pacific markets, a new alltime low.

Market confidence in the UK has been badly hit, on fears that Britain’s twin deficits – the budget, and the current account – will both widen alarmingly.

UK government bonds have been hit by a shocking selloff, driving up the cost of short-term borrowing to the highest level since 2008.

Analysts at Nomura warned that the pound will hit parity by the end of November, end the year weaker, and fall further below parity in 2023.

The Treasury and the Bank of England have attempted to reassure markets tonight, with the central bank insisting it ‘won’t hesitate’ to act if needed, and the government pledging to outline how it will bring down the UK’s debts over time.

But investors aren’t impressed, concerned that the Treasury’s plans won’t come until late November.

If a week is a long time in politics, a month is an eternity in a sterling crisis, and some economists are predicting more action will be needed soon.

Kwarteng announces he'll set out his "medium term fiscal plan" on November 23 - with new details of fiscal rules and publication of OBR targets.

That's *eight weeks* away.

— Pippa Crerar (@PippaCrerar) September 26, 2022

Top investors and economists had urged the bank to consider an emergency rate hike, perhaps a whole percentage point, to prop up sterling.

- Pound resumes drop as Bailey pours cold water on Emergency Hike
- BOE says that it will assess pound drop at next rate decision@business

— Francine Lacqua (@flacqua) September 26, 2022

Paul Donovan, chief economist of UBS Global Wealth Management, said that investors “seem inclined to regard the UK Conservative Party as a doomsday cult” – a sign of how much damage has been caused.

Despite the Bank’s lack of action, the money markets are still anticipating that Bank Rate will be hiked dramatically, to around 6% by next summer.

That could caused a housing crash, experts warned today, and would also mean a deeper recession and more companies going bust.

If mortgage rates rise to 6%—as implied by markets’ current expectations for Bank Rate—the average household refinancing a 2yr fixed rate mortgage in the first half of 2023 will see *monthly* repayments jump to £1,490, from £863. Many simply won’t be able to afford this (1/2)

— Samuel Tombs (@samueltombs) September 26, 2022

And in another worrying development, some mortgage brokers have been forced to temporarily pull offers from the markets, due to volatility and uncertainty.

The crisis is causing global interest, with one US central banker warning tonight that it could hurt the US and European economies.

And Labour are demanding an inquiry into whether hedge funds used inside information to profit from the mini-budget, by shorting sterling or gilts.

Goodnight, We’ll be back tomorrow with the latest developments…


‘It’s a major concern’: how two UK firms are facing up to pound’s crash

The slump in the pound is going to have major repercussions for UK businesses.

A craft brewer in Peterborough and a Birmingham metal stamping firm have told us how the coost of their raw materials and parts imported from abroad will rise.. while imports are more competitive.

Oakham Ales was one of the first UK brewers to source hops from America, seeking bolder, punchier flavours.

It proved a wise decision, catching the zeitgeist as consumer tastes changed. Citra is now a common ingredient in the mash tuns of Britain’s craft brewers and Oakham’s own award-winning Citra ale is sold in supermarkets such as Tesco and Morrisons.

The fall in value of sterling poses a threat to that success story.

“It’s a proprietary hop, which means we have to buy direct from one of the big American hop companies,” said Oakham’s spokesperson, Nick Jones.

“There’s no option on that, we have to buy in dollars, so obviously the pound plunging is a big problem for us.

For businesses whose exports are more valuable than their imports, it is a different story. The metal stamping company Brandauer, which turned 160 years old in March, sends products such as razor blades and components for electrical devices like kettles all over the world.

“At the minute, it’s upside for us,” said the the Brandauer chief executive, Rowan Crozier.

“It’s quite a good opportunity for us at the moment.

Here’s the full piece, by my colleagues Rob Davies and Jasper Jolly

US central banker says sterling crisis could hurt US and Europe

Concerns over Britain’s sterling and gilts crisis are going global.

Raphael Bostic, the president of the Atlanta Federal Reserve, has warned that the sell-off in the pound following the mini-budget reflect rising uncertainty about the direction of the country’s economy.

They could lead to greater economic stress in Europe and the United States, Bostic warned.

“The reaction to the proposed plan is a real concern and a fear that the new actions will add uncertainty to the economy,” Bostic said in a webcast interview with the Washington Post, adding:

“The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform.”

“These are just proposals, and we haven’t actually seen what’s going to play out.


— alfred (@macronewswire) September 26, 2022

Former Treasury mandarin: Markets have pound and gilts in their sights

Former Treasury permanent secretary Nick Macpherson warns that the markets now have sterling, and government bonds ‘in their sights’.

He fears that we haven’t seen the bottom of the market crisis yet….

HMG has broken a cardinal rule: don't look like an outlier relative to other G7 countries. The markets now have sterling and gilts in its sights. There will be rallies followed by brief substantive lurches downwards. We probably haven't seen the bottom. 4/

— Nick Macpherson (@nickmacpherson2) September 26, 2022

Meanwhile, the UK will pay a high risk premium for the increased debt it is selling, making it all but impossible to live within spending plans, even before inflation. HMG is expecting public sector workers to take bigger real wage cuts even than in 1931, which led to mutiny 5/

— Nick Macpherson (@nickmacpherson2) September 26, 2022

Today’s statements from the Bank of England (here) and the Treasury (here) can at best be described as “too little, too late”.

So says Alastair George, Chief Investment Strategist at Edison Group.

George expalins that the government have triggered a sterling crisis – and resolving it will cause serious economic pain.

George explains:

The pro-cyclical mini-budget is seen as counter-intuitive to international investors in the UK who must be wondering if politicians understand the ramifications of policies which have triggered a meaningful sterling crisis.

“Gilt yields and interest rate futures have jumped 1% since only Friday as traders expect the Bank of England to ultimately be forced to act to defend the currency - and at the expense of braking the domestic economy hard.

We fear this is will not be an easy situation to stabilise – monetary policymakers need to act decisively head off speculative attacks on the currency, separately from the relative merits or otherwise of the recently announced fiscal measures.”

The pound has now slipped back to $1.065, down two cents today, on top of the four cent plunge on Friday.

That’s till three cents above its record low overnight… but only one a cent above the previous all-time low for sterling, of $1.0545 set in 1985.

The Bank of England signals we are in a crisis after the emergency budget and says it won’t hesitate to put up interest rates - and the pound falls again. Which shows the Bank and Chancellor both have serious credibility problems. Worrying

— Robert Peston (@Peston) September 26, 2022

Reuters: Virgin Money and Skipton temporarily withdraw mortgage products amid turmoil

The volatility in the financial markets is forcing some mortgage producers to temporarily suspend their products, Reuters reports.

British lenders Virgin Money and Skipton Building Society temporarily withdrew their mortgage ranges for new customers on Monday because of the volatility in sterling funding markets, according to emails sent to brokers.

“Following a number of changes in the market, we have made the decision to temporarily withdraw all our products for new customers at 8pm tonight,” Virgin Money said in its email to brokers, seen by Reuters.

“We continue to monitor the situation closely and currently plan to relaunch products for new customers towards the end of the week.”

Skipton Building Society & Virgin Money have now withdrawn mortgage products for new customers. This chaos isn't sustainable.

— Martin Finch 🇺🇦 (@martin_finch) September 26, 2022

Earlier today, lender Halifax said it had temporarily withdrawn from the market all of its mortgage products that come with a fee, in response to turmoil in British funding markets.

A Halifax spokesperson said in a statement.

“As a result of significant changes in the cost of funding, we’re making some changes to our product range.”

Halifax, part of Lloyds Banking Group said there was no change to its product rates and that it continued to offer fee-free options at all product terms and loan-to-value levels.

We will not hesitate to change interest rates, says the Bank of England, hesitating to change interest rates.

— Henry Mance (@henrymance) September 26, 2022

UK government bond prices are tumbling even further, pushing up the yield (or interest rates) even higher.

The cost of borrowing for a decade has now hit 4.2%, from 3.5% in the middle of last week (before the mini-budget).

Another sign that the twin statements from the Treasury and the Bank of England have not immediately calmed the markets….

UK govt bond yields just spiked even higher.
10 year now up to 4.24%
This is NOT the reaction HMT & BoE would have wanted to their statements.
Still early doors. Let’s see what happens next...
Chart shows you the 10yr’s movements so far today

— Ed Conway (@EdConwaySky) September 26, 2022

The FT’s Chris Giles isn’t impressed by the Bank’s statement:

Got to be said that if @bankofengland wanted to look like it was willing to take dictation from @hmtreasury - the first substantive paragraph here could not do a much better job

— Chris Giles (@ChrisGiles_) September 26, 2022


Capital Economics: It's the bare minimum...will it be enough?

The government and the Bank of England have done the ‘bare minimum’ this afternoon to reassure markets, says Paul Dales of Capital Economics.

It remains to be seen whether today’s statement by the government and the Bank of England will be enough to ease the markets’ fears about the government’s fiscal policy, Dales warns, adding:

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.

This chart shows how the pound was unmoved by Kwasi Kwarteng’s pledge to outline his plans to achieve stable public finances in November, and then fell after the Bank of England did not announce an emergency rate hike.

Interesting sequencing today. @hmtreasury statement = no impact on £ despite a belated role for @OBR_UK. @bankofengland statement, though, delivers no emergency hike and pound starts to drop again. Implies fiscal credibility not recoverable short term (EURGBP up = £ weaker)

— Sunil Krishnan (@sunnyk100) September 26, 2022

Bank of England trying to quash speculation about an emergency hike

Viraj Patel, foreign exchange & global macro strategist at Vanda Research, suspects the Bank of England may be bounced into taking action, if ‘something breaks’ in the markets this week.

⚠️ No action from the BoE based on latest statement... looks like they aren't doing anything inter-meeting. This will be a disappointment for $GBP markets. I suspect this statement will last 24-48 hours before something breaks in markets & forces the BoE to act

— Viraj Patel (@VPatelFX) September 26, 2022

Neil Wilson of calls the Bank’s response to the sterling crisis ‘inadequate’.

Inadequate response from Bank of England. Which is no surprise given how complacent it has been over inflation. A nothing statement that probably does more harm than keeping quiet.

All our policymakers are failures

— Neil Wilson (@marketsneil) September 26, 2022


Andrew Bailey’s pledge that the Bank “will not hesitate to change interest rates as necessary” has disappointed some analysts, who were expecting more decisive action.

Traders are concluding that there is less chance of an emergency rise in interest rates.

Here’s some snap reaction:

The Bank of England says simply that it "will not hesitate to change interest rates as necessary". It's not much, but it may be enough.

As former Fed Chair Ben Bernanke once said, "Monetary policy is 98% talk, and 2% action".

— Matthew Thompson (@mattuthompson) September 26, 2022

Bank of England: don't panic.
Market: *panics*

— Sathnam Sanghera (@Sathnam) September 26, 2022

Trying to remember the last time the Bank of England had to issue a statement to reassure markets just one working day after a budget.

— Simon Neville (@SimonNeville) September 26, 2022

Buckle in….

— Emma Fildes (@emmafildes) September 26, 2022


Bank of England says it will not hesitate to change interest rates if needed following plunge in pound

Newsflash: The governor of the Bank of England has announced that the Bank ‘will not hesitate’ to change interest rates as needed, following the plunge in the pound since the mini-budget.

But it has not decided to implement an emergency rise in interest rates today, as some economists had expected – a move that has knocked the pound back towards this morning’s record lows.

It’s now down back below $1.07, having recovered to $1.09 earlier this afternoon.

The pound dips back to $1.06 after the Bank of England does not deliver any emergency action today. Sterling still 1.5% down against the dollar today

— Mehreen Khan (@MehreenKhn) September 26, 2022

Andrew Bailey says that the Bank is monitoring developments in financial markets “very closely” in light of the significant repricing of financial assets.

And he says that the Bank will make a full assessment of the government’s Growth Plan at its next scheduled meeting in early November.

Bailey says:

In recent weeks, the Government has made a number of important announcements. The Government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today. I welcome 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.

The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. 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.


The decision to not hold a new spending review means government departments face a funding squeeze, as budgets will not be adjusted to address soaring inflation.

The Times explained this morning that:

Millions of public sector workers face a two-year pay squeeze before the general election after Kwasi Kwarteng said he would go further in cutting taxes.

The government has abandoned plans for a new spending review, despite forecasts that inflation may remain in double figures for the next year. This means that public sector workers will have real-term pay cuts before 2024 and schools and hospitals will have to make tough choices about budgets.

New: A token to reassure markets from the Chancellor 👇

🏦 Kwarteng 'will set out his medium-term fiscal plan on 23 November'.
🏦 Will come with an OBR forecast.
🏦 Full Budget delayed to Spring.
🏦 Abandoned new spending review putting the squeeze on departmental budgets.

— Tom Witherow (@TomWitherow) September 26, 2022

Kwasi Kwarteng is trying to calm the markets by pledging to outline in November how he plans to bring down debt, as a share of the economy, in the medium term.

Mujtaba Rahman, MD of Eurasia Group, explains:

As expected. Key here is @KwasiKwarteng being clear that medium term fiscal consolidation plan will be released on 23 Nov alongside full OBR forecast

In @FT on Friday to @GeorgeWParker, the CX was suggesting the new year

So they've accelerated given market fallout

— Mujtaba Rahman (@Mij_Europe) September 26, 2022

Kwarteng: to set out his medium-term fiscal plan on 23 November.

Newsflash: UK chancellor Kwasi Kwarteng is to lay out his Medium-Term Fiscal Plan on 23 November, the Treasury has announced.

Significantly, the plan will show how debt will fall as a share of GDP in the medium term, following turmoil in the markets about the increased borrowing needed to fund Kwarteng’s Growth Plan.

The government is also goiing to set out supply side growth reforms from next month.

And the Office for Budget Responsibility is to release a full forecast, meaning we’ll get an official independent assessment of the state of the economy.

Here’s the full statement:

On Friday 23 September, the Chancellor of the Exchequer, the Rt Hon Kwasi Kwarteng MP, set out how the government would fulfil its commitment to cut taxes for people and businesses and announced wider supply side policies to grow the economy.

Building on this, as the Growth Plan set out on Friday, Cabinet Ministers will announce further supply side growth measures in October and early November, including changes to the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure.

Next month, the Chancellor will, as part of that programme, outline regulatory reforms to ensure the UK’s financial services sector remains globally competitive.

He will then set out his Medium-Term Fiscal Plan on 23 November.

The Fiscal Plan will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.

In the Growth Plan on Friday, the Chancellor set out that there would be an Office for Budget Responsibility forecast this calendar year. He has requested that the OBR sets out a full forecast alongside the Fiscal Plan, on 23 November.

As the Chief Secretary to the Treasury set out this weekend, the government is sticking to spending settlements for this spending review period.

The Chancellor also confirmed that there will be a Budget in the Spring, with a further OBR forecast.

Chancellor @KwasiKwarteng has set out how the Growth Plan will be delivered.

Our supply side reforms will be outlined from October, the Medium-Term Fiscal Plan will be published on 23 November & an @OBR_UK forecast has been commissioned for that date.

— HM Treasury (@hmtreasury) September 26, 2022


Shadow chancellor Rachel Reeves’s speech to the Labour conference today, amid the sterling crisis, has highlights its claim to be party of economic competence.

Rachel Reeves can rarely have had an easier gig, our economics editor Larry Elliott reports:

The shadow chancellor stood up to speak at Labour’s conference with the pound under pressure and rumours swirling that the Bank of England was about to announce an emergency increase in interest rates.

Labour has a recurring struggle to portray itself as the party of economic competence. Famously, Denis Healey dashed to Blackpool in 1976 to make an impassioned – but not entirely successful – appeal for conference’s support for tough measures during a previous sterling crisis.

It was all rather different this year. Reeves, a former Bank of England economist, was presented with an open goal thanks to Kwasi Kwarteng’s badly received mini-budget and she was determined not miss it.

Here’s Larry’s full report:

Full story: Markets warn sterling slump could lead UK interest rates to triple by next year

The plummeting value of the pound has sent the interest rate on government debts to a 12-year high, with money markets predicting the Bank of England base rate could almost treble to 6% next year.

Sterling tumbled to an all-time low of $1.03 against the dollar overnight before recovering to $1.07 in morning trading as traders priced in forecasts of a major intervention from Threadneedle Street to support the currency.

Traders expect the central bank to convene a meeting of its monetary policy committee (MPC) soon to raise interest rates from 2.25% to 3% before increasing them further at a scheduled meeting in November.

It was understood that officials spent much of Monday morning preparing a statement for the markets after No 10 spokesperson ruled out any comment on the situation by the government.


A statement was expected in late afternoon in the event of further falls in sterling, to send a message to investors that the Bank would use all its powers to bring inflation under control and down to its 2% target.

One analyst described sterling’s situation as “toxic”, while another said investors had digested the implications of Friday’s mini-budget, which stacked a further £45bn of unfunded tax cuts on top of an estimated £150bn bill for its energy price bailout scheme, and “seemed inclined to regard the UK Conservative party as a doomsday cult”.

A further rout of the British currency could take it below parity with the dollar and into uncharted territory on international exchanges.

Here’s the full story:

UK housebuilders’ shares are continuing to be pummelled by fears of sharply rising interest rates, that would hammer the sector.

Taylor Wimpey and Persimmon are both down over 6.7%, followed by Barratt (-5%), Berkeley Group (-4.3%) and property portal Rightmove.

And here’s why – market expectations that interest rates could be hiked back to 6% to prop up the pound.

Back when I began this thread (only last Thurs which already feels like a world away) 6% interest rates next yr seemed slightly far-fetched.
And no bad thing, because 6% would be hideously painful for many families (see 👆).
Today traders were betting on 6% rates next year.

— Ed Conway (@EdConwaySky) September 26, 2022

Borrowing costs haven’t been that high in 20 years.


Tim Farron, former leader of the Liberal Democrats, is offering some help to the government:

The last time the pound sunk as low as it is today, I was 15 and doing economics O’level. If I have a good search in the garage, I might find my text books in which case I’ll be happy to lend them to the PM and the Chancellor. Their need is apparently greater now…

— Tim Farron (@timfarron) September 26, 2022

Kwarteng isn’t short of textbooks, I suspect, as he has a PhD in economic history from the University of Cambridge.

Fittingly, it’s on Political thought of the recoinage crisis of 1695-7, when William III tried to replace England’s shoddy collection of silver coins. They’d been clipped, or shipped overseas where silver was worth more than the face value of the coins, and melted down.

But the goal of sticking to a gold and silver standard failed, and England eventually moved to a gold standard.

Professor Danny Blanchflower, a former Bank of England policymaker, attributes the pound’s recovery to hopes of a central bank intervention.

Gbp hit 1.03 now 1.0839 seems Mkts think intervention is coming what else explains turnaround of course that plunges uk into deeper recession this winter

— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) September 26, 2022

Uk economic policy in total dissaray

— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) September 26, 2022

UK borrowing costs rise over eurozone members

And here’s another chart showing how it now costs the UK more to borrow for five years than Spain, Portugal, Italy or Greece:

British 5 year government lending rates in the market, vs the so-called PIGS (the eurozone crisis countries from a decade ago)… UK has just today usurped Italy and Greece with a more expensive cost of credit… what @jfkirkegaard has nicknames #ilsorpasso

— Faisal Islam (@faisalislam) September 26, 2022

Economist Jim O’Neill, the former chairman of Goldman Sachs Asset Management who invented the idea of the BRICS economies, says he’s never seen a market move quite like the one last Friday.

Baron O’Neill of Gatley told Radio Four’s The World At One:

For the pound to have done what it did outside of our time zone this morning, tells you that this won’t be easy to stop unless there’s a tough Bank of England response or a more articulate presentation from the Chancellor and the Prime Minister as to what exactly it is they are really prioritising.

Baron O’Neill added that the government had ‘thrown the kitchen sink at everything’ in the mini-budget…and alarmed investors by not allowed the independent fiscal watchdog to give its vew.

By not allowing the OBR to come up with an independent assessment, it’s just created a view around the world that what on earth is going on inside the British Government and that there aren’t really many adults in the room, let’s say.”

Markets are also expecting extreme turbulence in the pound, as the implied volatility of the sterling-dollar trade has soared today.

Longer-dated sterling FX options hit more distressed levels today than after the Brexit vote

Here's at-the-money GBPUSD 6-month implied volatility

— Chris Whittall (@Chris_Whittall) September 26, 2022

Hard to argue with….

💥J.P. Morgan economists say investor distrust in UK policy is "entirely justified".

— Andy Bruce (@BruceReuters) September 26, 2022

There could be turmoil in the housing market if UK interest rates rise toward 6% by next summer, as the markets are currently pricing.

Many borrowers are due to come off their existing fixed-rate deals in 2023, and would face a sharp jump in borrowing costs if rates are that high.

Estimated number of mortgages reaching end of fixed rate period by initial fixed rate
- lots of caveats but suggests around 300,000 per quarter at the moment, peaking at around 375,000 in Q2 next year
(same thread, correct chart title!)

— Neal Hudson (@resi_analyst) September 26, 2022

Yep if rates go to 5.8% as now predicted by markets we're looking at a housing crash. Bigger problem than sterling.

— Sam Freedman (@Samfr) September 26, 2022

Bank of England could make statement today

The Guardian understands a statement is being prepared by the Bank of England that is likely to be issued later today, following the turmoil in the markets.

Hopes that the Bank will at least say something today have helped to lift the pound back from its record low.

Expectations of an emergency intervention on interest rates ahead of the BoE’s next scheduled meeting in November are also supported sterling.

Latest: The pound has regained its overnight losses, nudging above $1.08, stabilised perhaps by expectation of a @bankofengland statement (h/t @EdConwaySky) and market expectation that interest rates will rise 2% by November

— Paul Kelso (@pkelso) September 26, 2022

But government bond prices are still sharply lower today, hit by the prospect of huge extra borrowing to fund the tax cuts in the mini-budget.


Elsewhere in the markets, oil has hit a nine-month low on fears that a global downturn will hit demand.

Brent crude has fallen to $85.75 per barrel, the lowest since January, and down from over $120/barrel this summer.

That would mean motorists could look forward to cheaper petrol… but the pound’s weakness has wiped out some of those gains.

Sterling has now risen by around five cents since hitting its record low in Asia-Pacific trading.

Latest from the rollercoaster that is the UK currency market: sterling has just recovered some of its losses vs the US$.
Now at $1.09, the pound is now ABOVE where it ended the day on Friday.

— Ed Conway (@EdConwaySky) September 26, 2022

That’s a welcome recovery (helped by expectations that the Bank of England will step in).

But, that level of volalility is still alarming, and shows how the loss of confidence in UK assets in recent days is causing market volatility.

The price of UK five-year government bonds is now below both Italy and Greece, a decade after the eurozone debt crisis was gripping markets.

The UK’s five-year bond yields are now above those of *Italy and Greece*.

We are witnessing an almighty collision between ideology and reality.

— George Eaton (@georgeeaton) September 26, 2022

UK gilt prices have fallen more than Italy’s government bonds today too, despite the far-right Brothers of Italy party winning the most votes in Sunday’s election.

the fact that Gilts have widened more than BTPs today is just 😘🤌

— Robert Smith (@BondHack) September 26, 2022

Traders appear more worried about the meltdown in UK assets under Liz Truss than the implications of Giorgia Meloni’s success in Italy’s general election.

Traders are more worried by Liz Truss and a budget meltdown in the UK than a victory for far-right Giorgia Meloni in Italy’s general election

— Bloomberg (@business) September 26, 2022


Thomas Pugh, economist at audit, tax and consulting firm RSM UK says the Bank of England is likely to intervene to try to stabilise the market with an emergency rate hike.

Pugh reckons the MPC will probably want to give financial markets a little time to settle, especially as the pound has already rebounded from its all-time low.

It will also want to give the government time to come out with a statement on how it intends to manage the public finances in the medium term, to calm investors.

Pugh adds

As such, we’re likely to see MPC members and Governor Bailey making lots of public statements over the next few days emphasising the MPC’s commitment to 2% inflation and that it intends to raise interest rates sharply over the rest of this year. If combined with a sensible government plan for managing the public finances, that could be enough to halt the drop in the pound.

However, the next scheduled MPC meeting isn’t until 3rd November, which feels like a very long way off. Unless the pound rebounds sharply over the coming days, an emergency meeting is likely.

Precisely when this would come is anyone’s guess, but it could be as early as today or as late as next week. An emergency meeting would probably result in a super-sized rate hike of 100bps or more and a lot of hawkish rhetoric.

Kwarteng won't comment either

Kwasi Kwarteng has declined to comment on the turmoil in the markets.

The BBC spoke with the chancellor in Whitehall, where he said only that:

I’m not going to make any comment now, thank you.

Chancellor Kwasi Kwarteng declines to comment as pound hits all-time low against US dollar

— BBC Politics (@BBCPolitics) September 26, 2022

The ‘now’ could suggest there’s a statement coming at some point…..


The pound has now risen back above its closing levels on Friday, recovering from its historic slump overnight.

But at $1.09 it’s still desperately weak against the US dollar, down 19% so far this year.

Sterling now made back losses, now slightly up on day versus dollar and euro, though still at low historical levels

— Faisal Islam (@faisalislam) September 26, 2022

GBP green on the day

— FxMacro (@fxmacro) September 26, 2022

A penny (or a cent, there’s little difference tbh) for the thoughts of Tom Scholar, who was fired as the Treasury’s top civil servant barely two weeks ago.

The highly experienced, well respected Scholar was removed because the government wanted ‘new leadership’ to push through their plan of stimulating growth through tax cuts.

But Scholar’s experience through the financial crisis, and the pandemic, could be valuable today, as the markets give their verdict to the mini-budget.

As Nick Macpherson, another former Permanent Treasury secretary points out:

To fire your only official with serious experience of crisis management and then precipitate a crisis a fortnight later brings postmodernism to a new level. #poundrunny

— Nick Macpherson (@nickmacpherson2) September 26, 2022

Could the sterling crisis result in a vote of no confidence in Liz Truss?

Analysts at RBC Capital Markets suggest this is one possible scenario, especially if the poudn fell through dollar parity, telling clients:

Vote of no-confidence in Truss? Seems likely eventually, though Tory backbenchers probably have to be squeezed harder (the Telegraph suggested cable [the £/$ rate] below parity could be the trigger).

RBC add that “the government-supporting press greeted Friday’s event with fawning coverage” (surely not?!), and that Truss has pushed out those who didn’t support her:

A few analysts noted when Truss announced her cabinet that she had made no effort to build bridges – she promoted her allies, pushed out everyone else.

Doesn’t set her up well for surviving long but 20 days is a bit premature, even in a post-Brexit world where the UK is rotating PMs as fast as Italy.

There are already talk that some MPs could be putting in letters of no confidence, calling for a new leadership election, as our political correspondent Aubrey Allegretti explains:

Fury from a Tory MP who says talk of no confidence letters going in is not misplaced.

"My colleagues will rule nothing in and rule nothing out," they say.

"There will come a time where people have to say ‘I know it’ll make us look chaotic, but we can’t go on like this."

— Aubrey Allegretti (@breeallegretti) September 26, 2022

🚨🚨Tory MP + former minister: "Liz if f*cked... You cannot have monetary policy and fiscal policy at loggerheads. Something has to give."
"They are already putting letters in as think she will crash the economy."

— Agnes Chambre (@AgnesChambre) September 26, 2022

The best scenario, RBC add, would be a joint appearance from Bank of England governor Andrew Bailey chancellor Kwasi Kwarteng, delivering an emergency hike and a message that they are on the same page rather than pulling in opposite directions.

However, this is unlikely, they say, as the government is “clearly not in crisis mode’…..


Nomura: Pound to fall below dollar parity, as hope is not a strategy....

Analysts at bank Nomura have slashed their forecasts for the value of the pound.

They now expect sterling to hit parity with the US dollar by the end of November, and fall further by the end of the year to $0.975.

Further losses are expected early next year, with the pound hitting a fresh record low of 0.95% in the first quarter of 2023.

Nomura warn that the UK is facing a “a fundamental balance of payments crisis, with politicians hoping it will eventually just calm down”.

The first sterling-to-dollar parity calls come in -
Nomura sees the pound falling to $0.9750 by the year end, and to $0.95 in Q1 next year.

"This is a fundamental balance of payments crisis, with politicians hoping it will eventually just calm down. Hope is not a strategy."

— Jamie McGeever (@ReutersJamie) September 26, 2022

And in a blunt warning to the Truss government, they write:

Hope is not a strategy, and markets are reflecting that.

Nomura says there are three key pillars which could help the pound recover, in order of likelihood and timeliness:

  1. in the short term, the potential for a surprise rate hike from the Bank of England; (will this work? we explain why probably not in the full text below)

  2. Conservative backbenchers force a government U-turn (but how soon?); and

  3. A recovery of medium-term global growth expectations.

"GBP/USD below parity" - Nomura now forecast Pound-Dollar below parity by year-end $GBP

— Pound Sterling Live (@thepoundlive) September 26, 2022

Markets are pricing in a roughly 75 basis-point increase in Bank Rate before the end of the week, reports economist Sam Tombs of Pantheon Macroeconomics.

Markets are pricing-in a c.75bp increase in Bank Rate before the end of *this week* (the one-week OIS rate was 73bp above the SONIA rate a few ago). Sterling will weaken further if Governor Bailey doesn't act (I expect he'll dither but let's see...)

— Samuel Tombs (@samueltombs) September 26, 2022

The Bank of England may be reluctant to intervene in the markets though – in case it backfires. Memories of Black Wednesday – when speculators forced the pound out of the ERM – remain tender.

Brad Bechtel of investment bank Jefferies explains:

There is a growing chorus of market participants calling for the Bank of England to do something like an emergency rate hike. The risk with that strategy is that it may actually backfire and cause a further run on the GBP as the market prices in a further hit to growth and potential reaction from the new government to try to ease fiscal policy even more.

The BoE was also burned already trying to support the GBP back in 1992 and likely has very little appetite to try again. Also, a vote to hike by the BoE is sort of a vote of no confidence in the new UK government’s policy.

So I would not be surprised if they stand down for now and let things play out a little further.

Bank of England and Treasury are not denying there will be a statement on sterling later today

— Chris Giles (@ChrisGiles_) September 26, 2022

The surge in UK borrowing costs in recent months (and indeed, recent days), is quite staggering, and equally alarming:

A brief history of the 5-year UK gilt yield:
In Jan last year it was <0%

A year ago it was 0.50%

In March it was 1%

Last month it was 1.50%

Two weeks ago it was 3.00%

Last Thursday it was 3.50%

Today it is 4.6%, up over 100 bps in just two days

— Jamie McGeever (@ReutersJamie) September 26, 2022

Shadow chancellor Rachel Reeves has warned the Labour conference that prices in the shops, and the cost of borrowing, will both rise due to the market reaction to the mini-budget.

Our Politcs liveblogger, Andrew Sparrow, has the details:

Rachel Reeves, the shadow chancellor, started with an attack on Kwasi Kwarteng for the mini-budget announced on Friday.

She says the message from financial markets was clear on Friday. Today that message is “even more stark”.

The fall in the value of sterling means prices will go up.

It means the cost of borrowing for government will go up.

And the cost of borrowing for families will go up too, she says.

All for what? For tax cuts for the wealthiest, she says.

Reeves also said she would raise the minimum wage at a level that reflects the real cost of living, and reinstate the 45% top rate tax band, to hire more NHS staff

Big cheers as @RachelReevesMP ‘the 45p top rate of tax is coming back’

— Liam Thorp (@LiamThorpECHO) September 26, 2022

Our full coverage of the Labour party conference is here:

The only previous time the pound was this weak against the dollar was in 1985.

And back then, it took co-ordinated, international government intervention to stem the rampant dollar, through the Plaza Accord.

AJ Bell investment director Russ Mould reminds us:

“The G5 – as they were then – agreed at a meeting in New York to devalue the dollar against the Japanese yen, German deutschmark, French franc and the pound, and with the Bank of Japan already intervening in the foreign exchange markets [last week] it will be interesting to see if we get any co-ordinated action this time around.

That agreement was made at the New York Plaza Hotel. Finance ministers agreed that the US dollar should depreciate, after the greenback surged following interest rate hikes to cool US inflation (as we’re also seeing today).


Liz Truss's spokesman: we don't comment on market moves

Liz Truss’s spokesman has declined to comment on today’s market moves, following the hammering given to UK government bonds this morning, and the pound’s slide to a record low overnight.

The spokesman said (via Reuters):

“The chancellor has made clear that he doesn’t comment on the movements around the market and that goes the same for the prime minister.”

The spokesman added there are no plans to make any changes to the measures set out in the so-called ‘mini-budget’ by chancellor Kwasi Kwarteng on Friday.

That may disappoint investors who were alarmed by the scale of the tax cuts in the mini-budget, and the surge in borrowing needed to pay for them (as Mohamed El-Erian explained this morning).

Sushil Wadhwani, a former Bank of England policymaker, argues that the central bank should hold an emergency meeting – next week.

Wadhwani explains that the Bank shouldn’t wait until its next scheduled meeting in early November, given the inflationary impact of the weak pound:

“If I were still at the BOE, I would be tempted to announce an extra meeting in a week. The argument for waiting a week would be to give them time to properly assess the extra news.

The reason for not waiting until November is that they are cognisant of the need to respond in a timely basis to the new developments.

Of course, he adds, the BOE taking action is a ‘second best’ solution.

The first would involve the Chancellor coming up with a credible fiscal plan which is blessed by the OBR.”

Former MPC member Sushil Wadhwani says says the BoE should call an emergency rate hike meeting next week: “The argument for waiting a week would be to give them time to properly assess the extra news”.

— Mehreen Khan (@MehreenKhn) September 26, 2022

UK 10-year government bonds are on track for their worst month since Harold Macmillan was running the country in 1957, Reuters data shows.


— Andy Bruce (@BruceReuters) September 26, 2022

One can only imagine what Supermac, a One-Nation Conservative who got 300,000 homes a year built as housing minister, favoured Keynesian economics to fight unemployment and was thwarted in his attempt to lead Britain into the EEC, would make of the current government…..


Banks, housebuilders and retailers’ shares have been worst hit since Kwasi Kwarteng announced his £45bn fiscal giveaway on Friday, and then hinted that more is coming.

That shows the City is anticipating rising bad debts, falling demand for houses, and a deeper consumer spending squeeze.

Exporters have done better, thanks to the tumbling pound:

let's have a look at the best and worst performers in the FTSE 100 and FTSE 250 since the mini-budget/act of reckless fiscal abandon/tactically naive policy (choose your fighter etc):

FTSE 100: financials/housebuilders smashed
FTSE 250: REITs smashed

anyone feeling brave ?

— BionicBanker (@BrokenBanker) September 26, 2022

Starmer: Workers will pay price for market turmoil

Labour leader Keir Starmer has warned that working people would pay the cost of the “real turmoil” in the financial markets caused by the Conservative government.

Bloomberg has the details:

Ordinary Britons will have to endure higher mortgages and prices as a result of the government’s fiscal plans, Starmer said Monday at a Bloomberg business event at Labour’s party conference in Liverpool, northwest England.

The opposition leader’s remarks came after Chancellor of the Exchequer Kwasi Kwarteng on Friday announced the biggest tax giveaway in half a century, sparking a selloff in the pound and gilts amid market concern about rising government debt and inflation.

“The net result of Friday so far is taxes down for the richest and prices up for working people,” Starmer said.

He added that the country was “very worried” about the message Liz Truss’s government was sending.

More here: UK Workers Will Pay Price of Market Turmoil, Starmer Warns

Sky News’s economics editor, Ed Conway, suggests a statement from the Bank of England on the market moves could be coming…

Wouldn’t be surprised to see a statement from the @bankofengland on what’s going in markets v soon…

— Ed Conway (@EdConwaySky) September 26, 2022

The UK’s largest banks are set to face a test by the Bank of England that will prove whether they can weather an economic crisis that involves UK inflation surging to 17% and house prices plunging by a third.

The new stress test scenario is part of an annual exercise that is meant to weed out potential weaknesses in the banking system that could put the country’s financial system at risk.

Any lenders that fall short could be forced to raise billions of pounds in capital to strengthen their finances.

On Monday, the Bank of England confirmed that this year’s scenario would include:

  • UK GDP falling by 5% over 12 months

  • Inflation surging to a peak of 17% before falling to 11% over the next three years

  • House prices plunging 31%

  • UK unemployment more than doubling to a peak of 8.5%

  • UK interest rates peaking at 6%

Some mordantly amusing timing - the @bankofengland has just published its conditions for the 2022 stress test of banks.

— Andy Bruce (@BruceReuters) September 26, 2022

The Bank of England has reiterated that it is:

“Not a is a severe but plausible rail risk scenario intended to test the resilience of the UK banks to a range of materially adverse economic shocks.”

The Bank of England has run annual stress tests on the UK banking sector since 2013, as part of its response to the 2007 financial crisis.

However, it was postponed this year due to the war in Ukraine, which disrupted markets and put banks on high alert at the start of the year.

It means the results from the UK’s largest banks – which include NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide Building Society and Virgin Money UK – will be made public in summer 2023.


Ratings agency Moody’s predict Kwasi Kwarteng’s ‘substantial loosening of fiscal policy’ will lead the Bank of England to raise interest rates faster, to combat inflationary pressures.

We now see rates rising to more than 4% next year, compared with a peak of 3% previously. The chancellor also stressed the government’s aim of raising the trend rate of economic growth to 2.5%, though this will be difficult to achieve.

In this regard, incentives for businesses to invest were extended and further supply-side reforms are set to be outlined in the future.”

Labour urges investigation whether hedge funds shorted pound after mini-Budget 'leak'

Labour are urging the City regulator to investigate whether leaks of the mini-Budget allowed hedge fund managers to make huge profits by shorting the pound.

Shadow City minister Tulip Siddiq told the Evening Standard that the Financial Conduct Authority should examine reports that some hedge fund bosses had made “small fortunes” by betting against sterling.

Ms Siddiq told The Standard:

“The Financial Conduct Authority should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative Government to their wealthy friends contributed to the collapse of the Pound.

“A weaker Pound means that imports such as food and energy will become even more expensive, at time when inflation and the cost-of-living crisis is already spiralling out of control.”

Labour has urged an investigation into leaks of mini-Budget amid reports hedge fund bosses made ‘small fortunes’ by betting that Sterling would fall

— Evening Standard (@standardnews) September 26, 2022

The Sunday Times had some fascinating detail about the hedge-fund bosses who have been betting against sterling.

They reported:

A source who was present at a dinner attended by hedge-fund managers a week ago revealed: “They were all supporters of Truss and every one of them was shorting the pound.”

Several made small fortunes on Friday betting against the currency.

A source who was present at a dinner attended by hedge-fund managers a week ago revealed: “They were all supporters of Truss and every one of them was shorting the pound.”

How the 'Biscotti Budget' came to be, w/ @ShippersUnbound & @cazjwheeler

— Harry Yorke (@HarryYorke1) September 24, 2022

Friday was a stunningly bad day for the pound, points out Deutsche Bank strategist Jim Reid.

Reid’s team have calculated that it was the third-worst day for sterling (-3.57%) since Black Wednesday in 1992, only beaten by the day after the Brexit vote (-8.1%) and after the initial Covid shock in 2020 (-3.71%) in a global flight to dollars.

They also looked at daily Sterling moves back to 1862 and on that it was the 41st worst day in history spanning 47,000 trading days.

Nice stat from @JimReid35: Not only was Friday the third-worst day for sterling since Black Monday in 1992, it was the 41st worst day in the 47,000 trading days since 1862.

— Robin Wigglesworth (@RobinWigg) September 26, 2022

OECD: UK economy to flatline next year

As if we didn’t have enough bad news, the Organisation for Economic Co-operation and Development (OECD) has said the UK economy will grow slower than previously predicted this year.

The OECD has downgraded its forecast for GDP growth in 2022 to 3.4%, from 3.6%, due to “declining real incomes and disruptions in energy markets” (as the cost of living crisis hits households).

GDP is expected to flatline entirely in 2023 too.

OECD warns global economy is slowing down. Predicts UK GDP zero growth for 2023; negative growth for Germany and Russia. Economic damage aggravated by #Ukraine war and #coronavirus impact.

— Georg von Harrach (@georgvh) September 26, 2022

Pound’s plummet underlines schoolboy error by Kwasi Kwarteng

Chancellor Kwasi Kwarteng committed a ‘schoolboy error’ by pledging further tax cuts in a full budget planned for later this year, our economics editor Larry Elliott writes:

If the markets are worried about the state of the government’s finances and the increase in borrowing needed to fund your plans, it is not the wisest course of action to add to those concerns. Kwarteng’s inexperience has been exposed.

Here’s Larry’s analysis:

What the tumbling pound means to you

We’ve pulled together an explained about what the slump in the pound means.

Here’s a flavour:

What is a currency crisis?

When the pound suddenly begins to lose value against rival currencies in a steep decline. A sudden and sharp drop in the pound creates uncertainty, throwing the plans of UK businesses that import and export goods into disarray. They expected to pay a specific sum for imports and get a certain price for goods and services they sell abroad. All that changes when the currency falls. If the pound is worth less, the cost of importing goods from overseas goes up.

What does it mean for the UK and consumers?

A weaker pound means the cost of goods and services that are imported to the UK are more expensive. That means price rises for UK consumers who buy foreign goods, and it means your money won’t go as far if you travel, in this case to countries that use the US dollar.

Oil is one of the key goods Britain imports and it is priced on international commodity markets in dollars. A weak pound will make filling up your car with diesel or petrol more expensive. Gas is also priced in dollars…

And here’s the full piece:

Interest rate expectations are rising ‘by the minute’, reports Sky News’s Ed Conway.

This chart shows how the markets anticipate Bank Rate will hit 6% by next summer (based on the pricing of interest rate swaps).

Blimey. Investors are now better on UK interest rates topping 6 per cent by the first half of next year. You can see the expectations rising literally by the minute…

— Ed Conway (@EdConwaySky) September 26, 2022

This is literally incredible.

— Duncan Weldon (@DuncanWeldon) September 26, 2022

Analyst: emergency rate hike priced in

Money markets are now pricing in an emergency rate hike with 175 basis points’ worth of increases by November after the pound hit a record low against the US dollar overnight, explains Victoria Scholar, head of investment at Interactive Investor:

The knee-jerk reaction in GBP early on Monday has since pared losses with the pound regaining ground after the European market open this morning. The slump in sterling could exacerbate the UK’s inflation problem with price levels currently flirting with double digits. More expensive imports may add to the UK’s upward price pressures, which is likely to prompt more aggressive action from central bank policy makers.

Following the Fed’s 75 basis point move on Wednesday, the Bank of England opted for a more moderate 50 basis point rise, which in light of the Chancellor’s mini-budget and the market fallout, feels like a mistake. It looks like an emergency rate hike is on the cards as the Bank of England scrambles to bring inflation back down closer to target and calm the currency crisis.

The UK bond market has collapsed with yields surging, Scholar adds:

The two-year gilt yield hit the highest level since the height of the financial crisis in 2008 while the 10-year yield hit the highest since April 2010. Investors will be compensated more for holding government bonds, which have become riskier, given the elevated levels of unfunded borrowing that has been mapped out by the Chancellor to pay for his tax cuts.

On top of that the market is pricing in an increased probability that the Bank of England will move more quickly to raise interest rates, also lifting yields and punishing bond prices.

This, of course, doesn't provide relief to the UK #economy as it translates into higher borrowing costs and puts the @bankofengland in an even tougher position.

— Mohamed A. El-Erian (@elerianm) September 26, 2022

The 30-50 basis points surge in yields on UK government #bonds, an eye popping one-day move, is helping to stabilize Sterling for now--as is, albeit to a lesser extent, the further inversion of the curve.#economy #boe #EconTwitter#markets #bonds #sterling #gilts @bankofengland

— Mohamed A. El-Erian (@elerianm) September 26, 2022

Speculation of an emergency Bank of England rate hike is giving the pound some support, agrees Matthew Ryan, head of market strategy at global financial services firm Ebury

“Since hitting its lows, the pound has bounced back rather quickly as investors ramp up speculation that the Bank of England could intervene either by announcing an inter-meeting rate hike or by selling its foreign currency holdings.

We think that the latter is unlikely, although an emergency rate hike cannot be ruled out. In any case, markets now see the bank’s base rate rising to almost 6% in 2023 - a policy move at odds with the government’s attempts to support UK growth.”

Traders bet on emergency interest rate rise after pound hits record low

Traders are pricing in some dramatic increases in UK interest rates.

Bloomberg reports that the money markets now expect rates to have risen by more than 165 basis points after the BOE’s next meeting in November.

That would take rates to almost 4%, from 2.25% today, and could potentially come as an emergency move soon, plus a hike in November.

By next summer, the money markets are currently pricing that Bank of England base rate would hit 6%.

That would drastically hit mortgage affordability, and deepen the recession, and push some indebted firms to the wall too.

Money markets are pricing in 175 basis points of Bank of England rate hikes by November. Jeez

— Victoria Scholar (@VictoriaS_ii) September 26, 2022

The Financial Times has a good take too:

Traders ramped up bets on an emergency interest rate rise before the Bank of England’s next meeting in November. Derivatives markets are pricing in a rise of more than 0.5 percentage points in a week’s time and an increase of nearly 1.5 percentage points by the November meeting…..

The UK lacks the resources, and likely also the willingness, to try and intervene directly in currency markets to prop up the pound, unlike peers in Japan, which intervened last week.

However, the BoE’s rate-setting Monetary Policy Committee has met outside the normal cycle when markets have been turbulent in the past in a bid to restore calm, typically by cutting rates. Since it gained independence in 1997, the BoE has never raised rates between scheduled meetings.

The market’s verdict to the mini-budget (which was anything but mini) couldn’t really have been any more savage, says AJ Bell investment director Russ Mould.

“The sceptre of parity against the dollar, which felt far off just a week ago, now feels dangerously close.

“Amid talk of an emergency rate rise from the Bank of England, the FTSE 100 tried to rebound on Monday but quickly lost strength [now up only 0.01%].

This is what the government should not be too relaxed about: the yield on 5-year gilts. Because it reflects the interest rates bond market traders now expect to compensate for the risks of lending money to the UK government. It's now about 8 times what it was a year ago:

— Andy Verity (@andyverity) September 26, 2022

The pound is continuing to claw its way back, slowly and gingerly, from its overnight slump to a record low below $1.04.

Speculation of an emergency interest rate rise may be providing some support.

But, that would be a heavy blow to borrowers on top of last week’s 50bp hike in Bank Rate to 2.25%, and lead to a sharper recession.

And even at $1.075, sterling is still a cent below its Friday night close, after investors hammered UK assets following the mini-budget.

Sterling now back at 1.07 ish v dollar. Thanks For Playing The Forex.

— Robin Wigglesworth (@RobinWigg) September 26, 2022


Bloomberg: Pound-dollar parity looking more likely

It is looking more and more likely sterling will fall to parity against the dollar this year based on option market pricing, Bloomberg has calculated.

Here’s the details:

Sterling-dollar implied volatility suggests there is a 60% probability spot will hit 1.00 before the end of this year -- based on spot trading at $1.0552 -- compared to 32% on Friday.

Markets are also expecting extreme turbulence, with sterling-dollar’s three month implied volatility surging 4.31 percentage points to 20.05% Monday. That’s fast approaching the high of 20.62% reached during the 2020 pandemic meltdown.

It is looking more and more likely sterling will fall to parity against the dollar this year based on option market pricing

— Bloomberg Markets (@markets) September 26, 2022

The jump in UK gilt yields is pushing up the cost of borrowing for a decade to a 12-year high – exactly when Britain’s government is planning an awful lot more borrowing.

It’s going to be expensive….

Nudging an hour of trading in London & while sterling has recovered some of its overnight losses 10-year gilt yields - effectively the interest Government pays on borrowing, of which there is going to be much more - rose above 4.1%, highest in 12 years

— Paul Kelso (@pkelso) September 26, 2022

U.K. 10yr gilt yield 1% in Jan
Over 4.2% this morning
£2.4tn debt
This is going to be expensive.

— Louise Cooper (@Louiseaileen70) September 26, 2022


Investors 'inclined to regard Conservative Party as a doomsday cult', says analyst

Investors seem inclined to regard the UK Conservative Party as a doomsday cult, according to Paul Donovan, chief economist of UBS Global Wealth Management.

In his morning comment, Donovan gives an absolutely blistering verdict on the government’s plans:

The global signals from the UK’s mini-budget matter. Modern monetary theory has been taken into a corner by the bond markets and beaten up. Advanced economy bond yields are not supposed to soar the way UK gilt yields rose.

This also reminds investors that modern politics produces parties that are more extreme than either the voter or the investor consensus. Investors seem inclined to regard the UK Conservative Party as a doomsday cult.

Tax cuts are unlikely to give the UK a meaningful medium-term boost (the supply constraints in the UK economy are more about health and education). A short-term “sugar high” is likely but may be limited. A high-income earner’s rational response would be to increase savings in anticipation of future tax increases.

MMT takes a pounding - via @UBS

— Paul Donovan (@PDonovan_econ) September 26, 2022

El-Erian: Kwarteng should modify mini-budget to calm markets

Chancellor Kwasi Kwarteng is wrong to be relaxed about the market reaction to the mini-budget, accordining to Mohamed El-Erian, an advisor to financial service giant Allianz.

El-Erian, who’s also President of Queens’ College, Cambridge, says Kwarteng should be paying really close attention, otherwise “what’s happening in markets can snowball and undermine what he’s trying to do”.

El-Erian told the Today Programme that the moves in yields and the pound will translate into “even stronger stagflationary winds”, and that goes against Kwarteng’s push for growth.

El-Erian added that the Bank of England should hike interest rates by one percentage point if British finance minister Kwasi Kwarteng does not ‘recalibrate’ the mini-budget, removing the extra tax cuts that were introduced, which surprised the markets.

If the chancellor leaves his plans alone, the Bank of England should raise interest rates at an emergency meeting. But that also goes against Kwarteng’s plans.

Driving the car with the chancellor’s foot on the accelerator, and the Bank governor’s foot on the brake, is not a good way to drive the UK economy, El-Erian warns.

But even so, El-Erian says he would raise rates by a percentage points, if the chancellor didn’t change course.

“If I were the governor and the chancellor is not modifying his plan, I would increase interest rates and not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation,”

He’s also written about his concerns for the Guardian today, here:

On the market reaction to the new UK government's policy package -- the what, the why, and the so what. #markets #EconTwitter #uk #boe @bankofengland @guardian

— Mohamed A. El-Erian (@elerianm) September 26, 2022


Economist Shaun Richards suggest the Bank of England should stop its plan to start selling some of its stocks of UK gilts.

The BoE has decided to start unwinding its quantitative easing (QE) programme by selling £80bn gilts over the next few months. That, though, will add to the selling pressure in the bond market.

Putting quantitative tightening (QT) on hold could calm the markets…

Lots of talk about the Bank of England intervening but in the wrong market! With the UK ten-year yield at 4.1% it should scrap the plan for £80 billion of bond sales or active QT. That would calm things down....

— Shaun Richards (@notayesmansecon) September 26, 2022

…. and they’re certainly far from calm now, as UK gilts are being routed:

Goodness. Gilts are getting slammed against a wall. Yields up 20BPS across THE ENTIRE CURVE

— David Ingles (@DavidInglesTV) September 26, 2022

Shadow chancellor Rachel Reeves has accused Kwasi Kwarteng of having “fanned the flames” of the falling pound by hinting at further “unfunded” tax cuts.

Reeves told BBC Radio 4’s Today programme:

“It is incredibly concerning.

“I think many people had hoped over the weekend things would calm down but I do think the Chancellor sort of fanned the flames on Sunday in suggesting there may be more stimulus, more unfunded tax cuts, which has resulted overnight in the pound falling to an all-time low against the dollar.”

UK bonds are continuing to slump – pushing yields even higher.

The two-year gilt yield (which measures short-term borrowing costs) has hit 4.5% – double its level in mid-August.

At 4.5%, the 2-year UK Gilt yield is back up to Oct 2008 levels after spending a decade under 1%. This isn't an isolated incident, next up Italy's BTPs

— Rich Kleinbauer (@RMKOutFront) September 26, 2022

Here’s Reuters’ take:

British government bond prices collapsed on Monday when trading started, after sterling hit a record low against the U.S. dollar overnight, pushing yields to their highest in more than a decade.

Five-year gilt yields jumped more than 40 basis points to 4.503%, their highest since October 2008, while two-year yields rose more than 50 basis points amount to their highest since September 2008 at 4.533%.

Government borrowing costs surge over 4% as bond prices plunge

UK government bonds are selling off sharply in early trading – again, adding to the losses on Friday immediately after the mini-budget.

The yield, or interest rate, on UK two-year, five-year and ten-year gilts have all surged dramatically.

Yields (which rise when prices fall) measure the interest rate on the bond – so this shows that the UK’s cost of borrowing has jumped, just as it needs to borrow an extra £72bn this year to cover Kwasi Kwarteng’s plans.

The two-year gilt yield rose by 37 basis points (0.37 percentage points) at the start of trading, to 4.365%, the highest level since September 2008 – at the start of the financial crisis.

The five-year gilt yield has jumped 32 basis points to 4.38%, a level not seen since October 2008 (the month Lehman Brothers collapsed).

And the benchmark 10-year gilt yield rose to 4.08% at the open, the highest since April 2010 – a rise of 25 basis points today.

#UK #Gilts weaker across the board, front and mid of the curve taking the brunt of the yield move

— Max HarryHindsight Capital (@MaxDrake007) September 26, 2022


The FTSE 100 index of blue-chip companies listed in London has opened 0.33% higher, after recovering a little of Friday’s 2% slide.

The weak pound will benefit major exporters, making their goods and services more competitive overseas. Consumer goods maker Reckitt Benckiser (+2.8%), drinks group Diageo (+2%) and pharmaceuticals firm GSK (+1.7%) are among the risers.

But, the domestically-focused FTSE 250 index (a better gauge of the UK economy) has dropped by 0.75%, to its lowest since November 2020.

House-builders are leading the fallers in London, on fears of higher interest rates that will hit the property market.

The pound has clawed back some of its earlier losses, after its alarming crash in Asia-Pacific markets overnight.

Sterling is still in the red against the dollar, down 1.3% today at $1.071, still one and a half cents below Friday’s close.

On Friday, the pound shed four cents as investors were spooked by the surge in borrowing needed to fund Kwarteng’s plans. And back at the start of September, the pound was worth around $1.15.

The pound vs the US dollar in September
The pound vs the US dollar in September Photograph: Refinitiv

Capital Economics: Bank of England needs to step in

We’ve now reached the point where the Bank of England needs to step in in order to regain the initiative, warns Paul Dales of Capital Economics.

Dales says governor Andrew Bailey has two options.

One would be to come out this morning, emphasising the Bank’s commitment to the 2% inflation target and signal clearly that rates will be raised aggressively in early November.

But a more effective option is tough talk supported by a large and immediate interest rate hike. This would “shows the markets the Bank is writing the script not responding to it”.

Dales says the Bank could potentially lift interest rates dramatically higher – by a whole percentage point, or more.

That could involve something like a 100bps or 150bps hike in interest rates (to 3.25%/3.75%), perhaps as soon as this morning.

By bringing forward a lot of the policy tightening that might needed to have happened anyway, the Bank would demonstrate in no uncertain terms that whatever the government does it will ensure that inflation returns to 2%. This would go a long way to easing the crisis.

Sir John Gieve, former deputy governor of the Bank of England, says he would be worried about sterling’s plunge to a record low against the US dollar early this morning, if he was still working at the central bank.

He told BBC Radio 4’s Today programme:

“The bank, and indeed the Government, have indicated that they are going to take their next decision in November and publish forecasts and, so on that point, the worry is that they may have to take action a bit sooner than that.”


Labour MP Bill Esterson, the Shadow Minister for Business and Industry, points out that the weak pound will drive up imports – such as fuel.

What does the run on the pound mean?
It means higher prices. £6 more to fill up the car for example.
That’s what 12 years of ruinous Conservative government has done to our country.

— Bill Esterson (@Bill_Esterson) September 26, 2022

On Saturday, the AA warned that sterling’s plunge has left drivers paying an extra £6 for a tank of petrol. Today’s losses will drive that bill even higher.

Rachel Reeves 'incredibly worried' about market reaction to mini-budget

Shadow chancellor Rachel Reeves says she is incredibly worried about the fall in the pound overnight.

Reeves, who will address the Labour Party conference today, also pointed out that sterling’s slide puts pressure on the Bank of England to raise interest rates (as explained here).


- Reuters via

— PiQ  (@PriapusIQ) September 26, 2022

Reeves told Times Radio that:

“I started my career as an economist at the Bank of England and like everyone else I’m incredibly worried about what we’ve seen, both on Friday with market reactions to the chancellor’s so-called mini-budget, and also the reactions overnight,”

“It also puts more pressure on the Bank of England to increase interest rates.

The UK wakes up to the news that, down 5% at one stage, Sterling traded at a record low against the dollar in Asian market hours.

It is currently 2% weaker, at 1.06 per US dollar. #economy #markets #fx #sterling #dollar #uk

— Mohamed A. El-Erian (@elerianm) September 26, 2022

Comments by Chancellor Kwasi Kwarteng that he will go even further with historic tax cuts, which are “already being criticised as reckless”, have added to the anxiety, says Susannah Streeter, senior investment and markets analyst, at Hargreaves Lansdown.

She adds:

The worry is that not only will borrowing balloon to eye watering levels, but that the fires of inflation will be fanned further by this tax giveaway, which offers higher earners the bigger tax break.

Sterling 'fire sale' as exodus in UK assets continues

The “fire sale” in the pound comes as financial markets continue to voice their displeasure over the government’s fiscal policy plans, says Simon Harvey, head of FX Analysis at Monex Europe.

Momentum now drives the price action in the pound as the exodus from UK assets persists. The sick irony of this is that the weaker the pound gets, the more expensive the government’s liabilities become.

This is either through the price of its imported energy bill, which the government is completely exposed to given the energy price cap policy for households, or higher financing costs due to more expensive gilt yields.

Harvey also believes the Bank of England will need to raise interest rates, possibly “in the early part of this week”.

GBPUSD continued to get nailed overnight. Now, trading just above 1.05, it’s time for European traders to react and it’s purely a momentum trade at this point. BoE will have to intervene at one point, verbally won’t be enough.

— Simon Harvey (@_SimonHarvey) September 26, 2022

The Bank’s next scheduled meeting is in early November, after it lifted rates by half a percentage point last Thursday, to 2.25%.

Harvey suggests another 50bp hike, at least, might be needed now to ‘turn the tide’.

The option of a larger hike may be more popular among MPC members this week seeing as Number 11 Downing Street continues to stand by its guns as the Chancellor doubled down on his spending commitment over the weekend when speaking to the Financial Times, stating that there is “more to come”.


Sterling has also fallen sharply against the euro, adding to Friday’s losses.

The pound is down over two eurocents at €1.0984 (-2%), its weakest point since December 2020.

At one state in Asia-Pacific trading it sank to as low as €1.0832.

So while the US dollar is very strong – the highest in two decades – sterling’s weakness goes further.

“It’s just the strength of the Dollar”

— Andrew Levi (@AndrewPRLevi) September 26, 2022

Will Bank of England take action?

The pound’s drop was driven by “growing concerns about the UK’s policy credibility”, says Alvin Tan of RBC Capital Markets.

Tan also flags the speculation that the Bank of England might be forced to raise interest rates to strengthen sterling.

He says:

GBP/USD tumbled to a record low below 1.04. There is also increasing speculation about an emergency BoE rate hike.

Risk-off sentiment continues to dominate as the S&P 500 Index nears its June low, while crude oil prices have slipped to the lowest levels since the start of the Ukraine war.


Introduction: Sterling hits record low after Kwasi Kwarteng pledged more tax cuts

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

International confidence in the UK has been badly hammered by the mini-budget, and the Truss government’s tax-cutting policies, and the pound is paying the price.

Sterling had plunged to a record low against the US dollar in Asia-Pacific trading, extending the losses suffered on Friday, and moving closer to parity.

Investors have been rocked by the bonanza of tax cuts announced in Kwasi Kwarteng’s mini-budget – with the UK chancellor pledging over the weekend to pursue more tax cuts.

The pound plunged nearly 5% at one point to around $1.0327, Reuters data shows, a record low since at least decimalisation in 1971, as belief in the UK’s economic management and assets evaporated.

Even after stumbling back to $1.05 as City traders reach their desks this morning, the currency was down 7% in two sessions.

It could be a volatile day, with fears over a global downturn also hitting the markets.

Absolute chaos in FX markets

— IGSquawk (@IGSquawk) September 26, 2022

Naeem Aslam, chief market analyst at Avatrade, has a scathing assessment of the situation:

Sterling is getting absolutely pounded today in this week’s trading, and traders have started things exactly where they left off on Friday.

Sterling looks like an emerging market currency, especially when you look at the price of the British Pound a few months ago and compare it to where it is now.

The pound is in free fall. It hits a new record low and is quickly heading toward parity with the US dollar.

— Lisa Abramowicz (@lisaabramowicz1) September 26, 2022

Marc Chandler, chief market strategist at Bannockburn Global Forex, called the currency’s record plunge “incredible”. He believes there is bound to be speculation of an emergency Bank of England meeting and rate hike.

The pound has now slumped by almost 10% so far this month, hit by anxiety over a looming recession, and the surge in borrowing needed to fund Kwarteng’s £45bn giveaway.

Yesterday, Kwarteng told BBC One’s Sunday with Laura Kuenssberg tha Liz Truss plans to radically reshape the UK economy with even more tax cuts and fewer regulations/

“There’s more to come,” Kwasi Kwarteng said, declining to set a limit on how much public debt could be incurred in the process.

Chris Weston, the head of research at the brokerage firm Pepperstone, said the pound was “the whipping boy” of the G10 foreign exchange market, while the UK bond market was “getting smoked”.

Weston told clients:

“Investors are searching out a response from the Bank of England. They’re saying this is not sustainable, when you’ve got deteriorating growth and a twin deficit.”

“The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” Weston said.

The City is now looking to see whether the Bank of England takes steps to calm the markets.

On Friday afternoon, Deutsche Bank analyst George Saravelos said the BoE should hold a big inter-meeting interest rate hike as early as this week to calm markets and restore credibility….

Here’s the full story:

The agenda

  • 9am BST: German Ifo Business Climate index

  • 1.30pm BST: Chicago Fed National Activity Index on the US economy

  • 2pm BST: ECB president Christine Lagarde appears at the Economic and Monetary Affairs committee of the European Parliament in Brussels



Graeme Wearden

The GuardianTramp

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