It may not be Wednesday but the falls in sterling today and on Friday are bringing back uncomfortable memories of that “black” day when chancellor, Norman Lamont, scrambled to support the value of the pound raising interest rates twice in one day.
Friday’s fall in the value of the pound was the third-worst day for sterling (-3.57%) since Black Wednesday in 1992, only beaten by the day after the Brexit vote (-8.1%) and after the initial Covid shock in 2020 (-3.71%) in a global flight to dollars.
In reaction. money markets are now pricing in an emergency rate hike with 175 basis points’ worth of increases by November forecast as investors expect Bank of England governor, Andrew Bailey to intervene to prop up the ailing currency.
Simon Harvey, head of FX analysis at Monex Europe, said: “The risk of the Bank of England intervening has increased sizeably and we now look for an inter-meeting announcement in the early part of this week.”
Mohamed El-Erian, an adviser to Allianz, has said the Bank of England should hike interest rates by one percentage point if Chancellor Kwasi Kwarteng doesn't reserve the measures in his mini-Budget.
He told BBC Radio 4: "If I were the Governor and the Chancellor is not modifying his plan, I would increase interest rates and not by a little, by 100 basis points, by one full percentage point to try and stabilise the situation."
Neil Wilson, chief markets analyst, at Markets.com admitted the central bank is in a tough place but said “to not act would be wilful neglect.”
“ Just as the chancellor has taken a reckless approach to fiscal policy – a kind of economic vandalism – the BoE needs to take a very considered approach to monetary policy.”
“If the BoE stands idly by as the pound craters it would be as guilty as Kwarteng” he warned.
But it may not be that straightforward for the Bank as the conflicting worlds of economics and politics collide.
The Bank of England governor is likely to come under intense pressure from the chancellor to hold off an emergency rate rise for now which politically could prove ruinous.
Going back to 1992 the Major government never recovered its reputation for economic management after it hiked the bank rate briefly to 15% in September 1992, in a vain attempt to keep the UK in the exchange rate mechanism.
An emergency interest rate increase, just days after the new chancellor Kwasi Kwarteng’s statement could have a similar effect with voters already feeling the pinch from the cost of living crisis and now faced with increased mortgage bills to add to their woes.
Samuel Tombs, chief UK economist, at Pantheon Macroeconomics, said he thinks the markets are overestimating the chance that governor Bailey will call an emergency meeting this week.
He said Bailey won’t rush, “but will speak to the press or issue a statement in order to provide reassurance that the MPC will hike the bank rate by a very large increment—we now expect a 75bp hike—in November.”
He added “The risks, therefore, are tilted towards a further depreciation of sterling in the near term.”