he pound steadied and the bond market held firm today, easing fears of a currency crisis following yesterday’s spectacular sell-off.
On Monday sterling plunged to an all-time low of $1.035 as the market reacted fiercely to the government plans to fund tax cuts with fresh borrowing.
Today it edged up slightly to $1.078, a relief to both politicians and many in the City, perhaps excluding the hedge funds who are shorting the pound.
Meanwhile, chancellor Kwasi Kwarteng was heading for meetings with top bankers to discuss how best to reassure edgy markets.
The slump in bond prices left a 10-year government gilt paying interest of 4.3%.
That is higher than many countries usually regarded as less stable than the UK and a clear threat to the government’s borrowing plans.
Former Bank of England deputy governor Charlie Bean told the BBC: “One fact to get your head round. It now costs the UK government to borrow… than Italy or Greece, who we’ve traditionally thought of as being, well not quite basket cases, but certainly weaker-performing sovereign entities.”
Both Greece’s 10-year gilt yield and Italy’s was today at 4%.
The Bank of England said last night it would “not hesitate” to raise interest to whatever level is need to control inflation. Some expected an emergency rate rise then, something that could come depending on how this week goes on markets.
Chris Turner, global head of markets at ING, said: “UK markets will now be hyper-sensitive to any communication from policymakers. For a major reserve currency, it is typically hard to maintain these high levels of volatility for prolonged periods – but sterling may well try to defy that.”
Former US Treasury Secretary Larry Summers warned the pound could fall below $1 but admits he was surprised at the speed of the market reaction to the mini-budget.
He thinks the Bank of England should already have moved faster on rates.
He said: “The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts. I cannot see how the BoE, knowing the government’s plans, decided to move so timidly.”
Rising bond yields are forcing some lenders to pull their cheapest mortgage deals.
Lloyds today withdrew some home loans that customers pay an upfront fee to access – these are typically cheaper. Its Halifax subsidiary said the changes come “as a result of significant changes in mortgage market pricing”.
Other big lenders adopted a wait-and-see approach.
Nationwide Building Society said: “We are unable to comment on future commercial issues such as pricing and product availability although we continued to keep the market under review.”
One senior mortgage banker said: “We don’t want to put prices up just yet. But the pressure is on. If everyone else does it, we’ll have to.”