The pound continues to fall despite the Bank of England’s emergency measures to calm the market.
Sterling traded at $1.057 at midday, down from $1.069 this morning, down 0.4 percent after trading at $1.08 for most of Tuesday.
The pound fell to a lowest on record against the dollar at $1.03 on Monday before recovering slightly, but fearful markets forced intervention from the IMF and Bank of England.
The Bank of England announced it would buy government bonds to calm markets. The central bank said it wanted to avert a “material risk to UK financial stability”.
It comes after the International Monetary Fund slammed Liz Truss and Kwasi Kwarteng’s tax cuts for the wealthy and warned that “large and untargeted tax packages” in the UK were “likely to increase inequality”.
In its rare intervention, the IMF targeted the government after the Chancellor’s mini-budget on Friday caused sterling and bonds to plummet and gilt yields to soar, reflecting the cost of borrowing.
The FTSE 100 index also fell sharply after Wednesday’s open, falling more than 2 percent at times – down almost 140 points to 6846.4 – and appears to be heading for its lowest level in more than a year.
The market turmoil began after investors were spooked by Mr. Kwarteng’s plan to offer tax cuts for the wealthiest while dramatically increasing government spending.
“Given the heightened inflationary pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this time, as it is important that fiscal policy does not conflict with monetary policy,” said an IMF spokesman.
Mr Kwarteng is now stepping up his efforts to persuade the city of his economic plans amid criticism and the Bank of England’s announcement that a sharp hike in interest rates could be imminent.
The Chancellor met with investment banks on Wednesday after days of market turbulence. He has previously insisted he is “confident” his tax cut strategy will deliver promised economic growth.
In response to the criticism, a Finance Ministry spokeswoman said: “We acted quickly to protect homes and businesses this winter and next, following the unprecedented surge in energy prices caused by (Vladimir) Putin’s illegal actions in Ukraine.” .”
The government was “focused on growing the economy to raise living standards for all,” and the Chancellor’s statement of April 23 in the medium term.”
Union leader Sir Keir Starmer said the International Monetary Fund’s (IMF) rebuke should not be ignored and Mr Kwarteng should change course.
He told LBC radio: “I think the statement from the IMF is very serious and it shows what a mess the government has made in the economy and it’s self-inflicted.
“That was a step they didn’t have to take. Quite often, when markets are nervous when the pound falls, it’s because of an international event – a conflict in Ukraine, a cost of living crisis, an energy crisis. The government has imposed it on itself.”
Britain could find itself in “the perfect storm” if the Bank of England keeps raising interest rates, Tory grandee Sir Roger Gale has said – warning of a possible economic crash.
“If that [interest rate rise] happens, then we could have the perfect storm,” he said Good morning Britain. “I’m unfortunately old enough to remember the last financial crash when people came to my office in tears because they were losing homes and businesses.”
Sir Keir, who said his own adjustable rate mortgage had gone up a few hundred pounds, added: “So many people with mortgages are going to be really worried about what’s going on because they know what that means for their budget – The prices are rising.
“We all look at the chart and see the pound fall, but it’s not an abstract chart. This is reflected in people’s mortgages and so on.
“And people are very, very worried this morning.”
Shadow Chancellor Rachel Reeves said: “The government urgently needs to set out how it intends to solve the problems it has caused by its reckless decisions to waste money on an untargeted cut in the top tax rate.
“Waiting until November is not an option. The government urgently needs to review the plans made in its financial report last week.”
Former US Treasury Secretary Larry Summers told Newsnight the UK is facing a “very threatening” combination of factors.
“I honestly can’t remember a time when a series of policy announcements from a G7 country were so negatively received by both markets and economists,” he said.
“The combination Britain is facing is very menacing. I think the kind of warning that the UK got from the IMF today is the kind of warning emerging economies with new governments get a lot more often than a country like the UK.”
Mr Summers added that the market and IMF reaction was the result of a “number of unforced errors” from the UK.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the UK is at risk of losing its developed country status.
“Not only is it now beset by trade disruptions, an energy crisis and rising inflation, but it is also being closely monitored by the international organization known as the world’s lender of last resort,” Ms Streeter said.
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