The Bank of England (BoE) isn’t going to kick off an emergency rescue mission for the pound.
The pound slid to a record low after the British government unveiled plans for its biggest tax cut in 50 years yesterday (Sept. 26). Even though the announcement fanned fears of mounting debt and inflation risks, the central bank remained in wait-and-watch mode.
The monetary policy committee (MPC) will make a full assessment at its next scheduled meeting, which is on Nov. 3, the BoE said in a statement after markets closed.
“The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit,” it added.
London pound is falling down
Slow and steady road to curbing inflation
The UK has been witnessing a terrible spell of rising inflation, now in the region of 10%. To combat it, the BoE has hiked interest rates for seven consecutive meetings.
Most recently, during a meeting on Sept. 22, it raised rates by 0.5 percentage points to 2.25%.
“Higher interest rates make borrowing more expensive, encourage saving, and reduce how much people spend overall. This helps to push inflation down,” the BoE explained. But the effects aren’t immediate. The BoE only expects inflation to start falling next year to reach the target of 2% in around two years.
Will the pound keep falling now?
There’s an 80% chance that the sterling hits parity with the dollar before 2022 is over, according to Jordan Rochester, a strategist at the investment bank Nomura. He expects the pound-to-dollar exchange rate to be $0.975 by year-end.
“This is a fundamental balance of payments crisis, with politicians hoping it will eventually just calm down. Hope is not a strategy,” he said.
The UK’s current account deficit widened to a record 8.3% of GDP in the first quarter, largely owing to the surge in energy costs in the first half of the year.
The face of the pound is changing
In 1956, the UK treasury gave the BoE permission to use Queen Elizabeth II’s portrait on its bank notes. Four years later, she appeared on the £1 note. Thereafter, the queen’s image made its way onto every coin and bill.
After the Queen’s death, King Charles is set to appear on four bank notes—the £5, £10, £20 and £50 bills—the designs of which the BoE will release by the end of this year. These notes will not go into circulation before mid-2024. “New notes will only be printed to replace worn banknotes and to meet any overall increase in demand for banknotes,” the central bank said.