Sterling hits record low but rebounds as markets keep close eye on BoE

LONDON: Sterling skidded to an all-time low against the dollar before recovering on Monday, as investors waited to see if the Bank of England will intervene to calm concerns over government plans that could stretch the country's finances to their limit.

The currency plunged as much as 4.85% percent to $1.0327 in thin Asia trading, extending a 3.61 percent dive from Friday, when finance minister Kwasi Kwarteng unveiled historic tax cuts and the biggest increase in borrowing since 1972 to pay for them. But by 1306 GMT sterling was flat at $1.0853.

It was also 0.35 percent higher against the euro at 89.04. pence per euro, after falling to 92.60 pence, its lowest against the single currency in two years. "The further fall in the pound in early trading means that we’ve now reached the point where the BoE needs to step in in order to regain the initiative," Paul Dales, Chief UK Economist, Capital Economics in London.

Broadcaster Sky News' economics editor reported that a statement from the BoE on the turmoil in markets could be released "very soon". Money markets are fully pricing in the BoE raising rates by a percentage point to 3.25% at its next meeting, according to Refinitiv data. IRPR

But that meeting doesn't come until Nov. 3. Sterling three-month implied volatility surged to almost 20% on Monday, its highest since just after the Brexit referendum in 2016.

British government bond prices were on track for their biggest slump of any calendar month since at least 1957, according to a Reuters analysis of Refinitiv and BoE data. read more

Economists and investors said Prime Minister Liz Truss's government, in power for less than three weeks, was losing financial credibility in unveiling such a plan just a day after the BoE hiked interest rates to contain surging inflation.

A spokesman for Prime Minister Liz Truss said on Monday that the British government does not comment on market moves and is sticking to its fiscal plan laid out last week. read more

That so-called "mini budget" is designed to snap the economy out of a period of double-digit inflation driven by surging energy prices and a 15-year run of stagnant real wage growth. In total, the plans will require an extra 72 billion pounds of government borrowing over the next six months alone.

Marc Chandler, chief market strategist at Bannockburn Global Forex, called the currency's record plunge "incredible". "The weekend press tarred and feathered sterling with assertions of its emerging-market status," he said. "I don't buy that schadenfreude. Still, there is now bound to be speculation of an emergency BOE meeting and rate hike."