Pound and FTSE recover losses after Bank’s surprise monetary intervention

The pound has managed to recover ground and London’s top index was in the green following the Bank of England surprise intervention to calm gilts markets on Wednesday.

The Bank said it would launch an emergency programme to buy government bonds – known as gilts – “on whatever scale is necessary” to try to bring down soaring UK public borrowing costs.

It sent sterling into the lurch, which dipped to around 1.05 against the US dollar immediately after the announcement.

However, the pound had edged back up to around 1.08 by the time European markets closed.

The intervention also seemingly calmed the FTSE 100 index which had slumped in early morning trading and again immediately after the Bank of England’s announcement.

It fell more than 2% in late morning – down nearly 145 points at 6841.35 – and appeared to head for its lowest level for more than a year.

But by the end of the day the index had recovered its losses and was above the 7,000 mark in a sign that investors’ fears were somewhat relieved by the Bank’s bond-buying spree.

The early morning stock sell-off followed market losses in the US overnight and as the International Monetary Fund (IMF) put further pressure on Chancellor Kwasi Kwarteng, warning that his deep tax cuts would fuel both inflation and inequality.

The pound plunged to a record 1.03 US dollars on Monday after Mr Kwarteng’s tax cutting mini-budget and there are fears it could head towards parity unless the UK Government can ease financial market fears over its plans to slash taxes.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The IMF’s move has added to worries that the UK is fast taking on the characteristics of an emerging market economy, and risks ditching its developed country status.

“It’s now not only wracked with trade disruptions, an energy crisis and soaring inflation, but it’s also being closely monitored by the international body known as the world’s lender of last resort.”

The Bank of England is facing calls to convene an emergency meeting to consider hiking interest rates to try and counter the Government’s tax cut measures.

The Bank’s chief economist, Huw Pill, said on Tuesday a “significant monetary response” may be required, but signalled this would not come until policymakers are due to meet as scheduled in November.

But some analysts suggested that the intervention from the Bank on Wednesday could buy it some time ahead of November’s meeting.

Allan Monks, an economist at JP Morgan, said: “The latest rhetoric from the Bank of England vindicates our view that the Bank would ramp up its hawkishness and stand ready to do what is necessary to stop inflation expectations from rising, yet without rushing to action.

“We think the Bank will end up having to deliver something close to what markets expect going into its November meeting to keep a lid on inflation expectations and provide stability to the currency.”