Monica Miller and Peter Hoskins BBC Economics Correspondents
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After the announcement of the biggest tax cuts in the last 50 years in the UK, the British pound fell to record levels against the US dollar.
Upon the developments, the Bank of England gave the message that it would not hesitate to raise interest rates.
In the statement, it was also given the message that the activity in the markets was followed closely.
The Bank stressed that an urgent meeting will not be held and that the interest rate decision will be made at the meeting to be held in November.
An important development of the day was that some large groups stopped offering mortgage products.
Halifax, the largest in this area in the UK, cited market volatility as the reason for the decision.
While seeing 1 pound approaching the level of $1.03 in Asian stock markets, it only rose to $1.07 after the Central Bank’s statement.
UK Finance Minister Kwasi Kwarteng said on Friday that a £45bn package will be introduced, as well as tax cuts.
The British pound has been under pressure against the dollar’s resistance for some time now.
In Asian stock markets, the euro also fell to the lowest level in the last 20 years against the dollar.
Investors’ failure to see the end of the war in Ukraine and thus the energy crisis and the uneasiness created by the approaching winter play a role in this.
If the pound stays at this level against the dollar, imports of commodities such as oil and natural gas traded in dollars will cost the UK much more.
There will also be a significant increase in the prices of other products imported from the USA.
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British Finance Minister Kwasi Kwarteng announced on Friday that there will be a radical change in the tax system in the UK.
Within the framework of these plans, which he called “a new era” for the economy, cuts in income tax and stamp tax from house sales were announced, and a step back was taken from the tax increases expected to be brought to companies.
Kwarteng argued that a change of direction was needed to trigger economic growth.
The opposition Labor Party, on the other hand, said that Kwarteng’s plans would not bring a solution to the cost of living problem in England, arguing that these plans would reward the already wealthy.
As financial markets open, investors will be watching closely what kind of momentum the sterling will follow.
Peter Escho of investment firm Wealthi said, “All currencies are being offered against the US dollar, which puts the dollar in a stronger position. However, in the case of the sterling, the concern that the new government’s tax cuts would increase inflation was also effective,” he said.
Esho continued:
“When you add energy incentives and the news that the Bank of England will have to go to an extraordinary meeting to increase interest rates, there is a complete panic atmosphere.”
Some investors say the Bank of England may have to step in to prevent the pound from depreciating.
Stephen Innes of SPI Asset Management also said:
“In order to stop the bleeding, even temporarily, the Bank of England can be pulled to the point of ‘do whatever is necessary’ in order to reduce inflation.
“An extraordinary meeting may be held this week in order to increase interest rates in order to regain the confidence of the markets. This meeting could even be held today.”
Analysis: Increasing pressure on government to intervene
Faisal Islam | BBC Economics Editor
The government continues its stance of not commenting on the depreciation of the sterling.
But whatever external statements are made, behind the scenes the government must be deeply concerned about the sterling’s continued decline to record levels. At the same time, the rising cost of public debt is equally worrying.
While the Liz Truss government, which announced that it would pay the difference by placing an upper limit on the rising energy prices and seriously reducing its tax revenues with the cuts it announced, said that it would meet this money with public borrowing, the Bank of England does not hide that it will continue to increase the policy rate in order to restrain the inflation that has risen to record levels.
These interests will also be reflected on individuals and companies with term debts. On the one hand, tax cuts are planned to increase the money in the market and prevent a recession, on the other hand, rapidly rising interest rates may worsen the recession.
The pound last approached 1.05 against the dollar in 1985.
The government then said that it was nothing to worry about because of dollar speculation.
Documents from that period, which were later released, prompted then-prime minister Margaret Thatcher to ask Ronald Reagan for clarification and pressured the Treasury to set up a trap for speculating wilds against sterling.
Sterling is weakening this time against other major currencies such as the euro. And some economists and market experts think that the Federal Reserve may have to intervene in some way to restore confidence.