The British pound fell Thursday by more than 1% one day after the Bank of England (BoE) declared it would start buying long-dated bonds in an effort to ease the market pressure and bring down interest rates on government debt.
The pound fell to as low as $1.0763 early in the morning, before jumping back to $1.0792 as of 12:50 PM GST Thursday, with only a 0.41% decline from its previous close of $1.0837.
On Monday, the pound briefly touched its lowest point in history against the dollar as it fell by 5% to $1.0350. The British currency has been steadily falling against the US dollar this year. This month, however, it has been hitting levels not seen since 1985.
The BoE aimed through buying government bonds, known as gilts, to calm the markets which had been fretting over concerns that last week's 'mini-budget' would significantly increase UK debt.
On Friday, the UK Finance Minister Kwasi Kwarteng proposed a growth plan, dubbed 'mini-budget' by the media, which included the most significant package of tax cuts in 50 years to stimulate growth, sending the pound and government bonds into freefall. In addition to the cuts, the plan included reforming the economy's supply side and increasing government borrowing.
The BoE said Monday in a statement it would not hesitate to uphold its aggressive monetary policy and revise interest rates, as needed, to return inflation to the 2% target sustainably in the medium term, in line with its remit, despite fears of a recession. However, it retracted its stance Wednesday by announcing to buy long-dated bonds in an attempt to stabilize markets in turmoil.
The statements of the BoE and Kwarteng at the close of trading Monday drove the pound 1.5% lower to $1.07 from its opening of $1.08, while causing the yield on 30-year government gilts, usually considered to be stable, to experience extreme volatility over the week.
The accelerated market stress prompted Mohamed El-Erian, an advisor to financial services firm Allianz and president of Queen's College in Cambridge, to accuse the "overambitious" plan of Kwarteng in an article in The Financial Times Wednesday of being the catalyst behind this historic time in the UK economy, describing the tax cuts as "unsettlingly large, relatively regressive and unfunded."
The International Monetary Fund (IMF) also warned the UK government Wednesday that its conflicting policies and ramping up growth via tax cuts would only increase inequality. El-Erian called the IMF's statement "more familiar" to developing countries than a G7 economy.
