British Pounds Scales Down as BoE Fails to Allay Fears of Depreciation

Pounds Sterling

The British Pound has been pummeled down and remains under pressure, with the divergence of fiscal and monetary policy subverting the currency. The Bank of England (BoE) is not helping matters as they have proceeded to release a statement upsetting market speculation of some form of intervention.

They have indicated the need for change, but no change has occurred, but they are monitoring.

Sterling has been under pressure since Friday after Chancellor of the Exchequer Kwasi Kwarteng announced the UK government’s tax cuts and deregulation plans. Over the weekend, he stated that the plans would be debt funded.

The markets worry over tax cuts because the UK government can choose to fund its debt without paying away a significant risk premium. This premium can be paid via a higher interest rate expense, a devaluation of the currency, or a combination of both.

Loosening fiscal policy is contrary to the BoE ‘s goals that they are trying to achieve by tightening monetary policy to rein in sky-high inflation. It is also in contrast to other developed markets where repaying pandemic debt accumulation is a typical feature.

BoE Governor Andrew Bailey released a statement yesterday where speculations of a change in interest rates or FX intervention were hosed down. He said, “The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets.”

The statement was similar to that of the Bank of Japan (BoJ) when USD/JPY approached 145. A week later, they physically intervened in the FX market when it was above 145.

UK rates had already been rising, and these events sparked another boost in yields.

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