The pound will soon be worth less than a single euro as the crisis for the British currency shows no signs of abating, a top economist has warned.
Larry Summers, former US Treasury Secretary, said he was “very pessimistic” about the outlook for the pound after Kwasi Kwarteng’s “utterly irresponsible” mini-Budget last week.
He warned Britain’s ballooning deficit underscored the scale of the crisis, adding: “My guess is that [the] pound will find its way below parity with both the dollar and euro.”
Mr Summers, who advised Bill Clinton and Barack Obama and is a former President of Harvard, said confidence in the UK economy would only be restored with a policy U-turn.
He took aim at both the Government and the Bank of England for their handling of the issue, saying: “The first step in regaining credibility is not saying incredible things.”
The pound has clawed back some losses this morning, but markets are still predicting that it will tumble to parity with the dollar by the end of the year.
Statements issued yesterday by the Treasury and the Bank of England have failed to assuage investor concerns, with some banks pulling mortgage deals due to the uncertainty.
Follow the latest updates below
Banks guarantee low mortgage rates for nine months
Banks and building societies are offering to guarantee mortgage rates for an unprecedented nine months to help borrowers avoid ruinously high repayments next year.
Charlotte Gifford reports:
Normally homeowners are able to lock into a fixed-term mortgage rate around three months before the existing deal expires, so long as they stay with their lender.
But major lenders including Barclays, First Direct, HSBC and NatWest are letting customers begin a “product transfer” between four and six months before their current deal comes up for renewal.
Simon Gammon of Knight Frank said Nationwide was offering the most generous window – “they give you up to three months in which to get the mortgage offer approved and then you have six months to use it”, he said.
In effect this guarantees the rate for nine months.
By getting a new deal now, borrowers could stand to save hundreds if not thousands of pounds.
UK facing ‘painful’ recession, warns Deutsche Bank
Deutsche Bank’s chief economist has said he expects the UK to enter a “deep and long” recession as the Bank of England plays catch-up to control inflation.
David Folkerts-Landau told Bloomberg: “We’re thinking in terms of a recession that will be deep and long. That’s the price we have to pay for financial stability and getting on the right track.”
Mr Folkerts-Landau said the BoE was two to three percentage points behind where it should be, adding it would be a “little risky” to wait until the next scheduled meeting in November to make a move.
Still, he reckons it’s more likely the pound will climb back to $1.15 than hit parity.
He said: “The Bank of England has been late in raising rates and in too small amounts. Rates have to go up significantly.”
German finance minister wary of UK’s fiscal ‘experiment’
German finance minister Christian Lindner has raised doubts over the Government’s plans to ramp up spending while the central bank tightens policy to control inflation.
Speaking at an event last night, he said: “In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes.
“I would say we wait for the results of this attempt and then draw the lessons.”
Mr Lindner, the hawkish head of the pro-business Free Democrats, has been pushing Germany to return to constitutional debt limits after breaches during the pandemic.
He’s said that further government support packages would undermine measures taken by central banks to fight inflation.
He said: “We must not counteract the central bank’s policy of rising interest rates by sending fiscal stimulus for demand or for growth.
“The expansionary fiscal policy of the past years has certainly also contributed to the fact that we are seeing such inflationary developments.”
Emergency BoE meeting would have made sense, says former Deputy Governor
A former Deputy Governor of the Bank of England said he would likely have advised the central bank to call an emergency meeting following market turmoil this week.
Charlie Bean said such a move would have made sense, but added that the lesson of emergency interventions was “you go big, and you go fast”.
He told the BBC:
On this occasion if I had still been at the bank in my role as deputy governor I certainly would have been counselling the Governor that I think this is one of those occasions where it might have made sense.
The key thing is, if you call it, you have to take significant action.
Bin firm Biffa agrees £1.3bn takeover
Biffa is by far the biggest market mover this morning after it agreed a £1.3bn takeover deal by a US investor.
The waste management firm said Bears Bidco, a new company run by Energy Capital Partners, will pay 410p per share.
It comes three months after Biffa told shareholders it was likely to accept a £1.4bn bid from ECP.
Shares surged more than 28pc to the top of the FTSE 250.
Ken Lever, chairman of Biffa, said:
Whilst being lower than the proposal previously announced on June 7, it is the Biffa board’s view that this offer represents a compelling opportunity, particularly in a weakening economic environment, for shareholders to realise, in cash and with certainty, the potential for future value creation.
Ofgem tells energy suppliers to do more to help struggling customers
Energy regulator Ofgem has told two household suppliers to better monitor and help struggling customers ahead of another jump in bills.
Gas and electricity costs will almost double on October 1 compared to last winter. While Liz Truss has stepped in to cap bills at £2,500 per year, that will still leave many consumers unable to pay bills.
Ofgem called out Scottish Power and Utilita Energy for having “severe” weaknesses in the way they deal with customers with payment difficulties.
A review of suppliers found issues with lack of policy and management oversight that was tailored to struggling customers and a lack of adequate training materials for staff.
Jonathan Brearley, chief executive of Ofgem, said:
We accept that there are many pressures on energy companies in the market this winter, but the needs of vulnerable customers must be part of their top priorities.
Mystery gas leaks hit Russian pipelines to Europe
Away from the pound chaos, there’s more trouble afoot with Russian gas supplies.
European countries are scrambling to investigate unexplained leaks in two Russian gas pipelines running under the Baltic Sea near Sweden and Denmark.
Sweden issued a warning about two leaks in the Nord Stream 1 pipeline, shortly after a leak on the nearby Nord Stream 2 pipeline was discovered that had prompted Denmark to restrict shipping in a five nautical mile radius.
Both pipelines have been at the centre of an escalating energy war between Europe and Moscow that has sent gas prices soaring and risks sparking a recession across the bloc.
Neither pipeline was pumping gas to Europe at the time leaks were found, but the incidents will hinder any effort to start or restart supplies.
George Osborne weighs in on market chaos
Former Chancellor George Osborne has some choice words about yesterday’s turmoil.
Kwasi Kwarteng, the current incumbent in Number 11, is among those to have shrugged off market reaction…
Pound still vulnerable, says short-seller Crispin Odey
Crispin Odey, the hedge fund tycoon who’s known for shorting pound, reckons the worst isn’t over for the British currency.
The money manager said it will take a long time for the UK to get inflation under control and predicted that the Bank of England is unlikely to roll out emergency interest rate rises.
“That will be too much of a panic,” he told Bloomberg. “I think sterling is still quite vulnerable and we have to see how it goes.”
Mr Odey’s bets against the pound have sparked outrage, with critics saying he’s profited from the UK’s economic woes after backing Brexit.
He made around £220m in a day when the pound slumped in June 2016 following the vote to leave the EU, though he lost that money within weeks as markets rallied.
His flagship Odey European hedge fund has surged 140pc over the last year, largely driven by short wagers on government bonds, according to the report.
FTSE risers and fallers
The FTSE 100 has climbed this morning as traders keep a close eye on comments from BoE chief economist Huw Pill after yesterday’s plunge in the pound.
The blue-chip index rose 0.6pc, boosted by gains for mining stocks.
Anglo American, Rio Tinto and Glencore were among the top risers, tracking metal prices higher.
Lloyds slipped 0.3pc after Halifax said it had temporarily withdrawn all of its mortgage products that came with a fee, while insurer Admiral Group shed 4.5pc after a share placing.
The domestically-focused FTSE 250 rose 0.8pc. Waste firm Biffa surged 29pc after it agreed to a £1.3bn takeover by a US investor.
Banks pull mortgages from sale amid interest rate chaos
ICYMI – here’s our top story of the morning:
Banks have withdrawn mortgage deals in anticipation of a rate rise from the Bank of England to counter the turmoil facing the pound in the wake of last week’s mini-budget.
Halifax, Virgin Money and Skipton were among providers to take the step.
The lenders acted after a day of wild swings on currency markets which saw the pound fall to a record low of less than $1.04 against the dollar and a big sell-off of British government gilts.
The chaos led the Treasury to issue a statement pledging to set out its approach to managing the public finances, followed minutes later by the Bank of England saying it was watching markets carefully and wouldn’t hesitate to increase rates at its next meeting.
Markets now expect rates to rise sharply in the coming months – with traders predicting they will hit 6pc mid way through next year, which would add £800 to the monthly cost of a typical mortgage.
Mr Kwarteng has publicly played down any concerns about sterling movements in recent days and yesterday declined to comment on recent drops.
FTSE 100 opens higher
The FTSE 100 has gained ground at the open as calm returns to the markets after yesterday’s turmoil.
The blue-chip index rose 0.4pc to 7,046 points.
Markets bet pound will fall below parity
Sterling may be regaining some ground this morning, but markets are still gloomy on the outlook.
Traders are betting there’s a 43pc chance the pound sill tumble to just $1 before the end of the year. At the same time, analysts at banks including Morgan Stanley and Nomura said they expect it to touch or cross that level.
Jordan Rochester, a strategist at Nomura, told Bloomberg: “I think it’s going to get worse unfortunately. I don’t want it to be worse. This is the country I earn my money in.”
Kwasi Kwarteng to meet top bankers
Kwasi Kwarteng is due to meet senior bankers today in what could turn out to be a difficult encounter.
The meeting was scheduled as a polite conversation about the Chancellor’s plans to drive economic growth. The crisis in the pound and government bonds may turn it into more of a crisis summit.
Shares in British banks and insurers have taken a beating since Mr Kwarteng’s mini-Budget on Friday shocked markets and triggered questions about how Prime Minister Liz Truss’s new administration will pay for its huge tax-cutting and energy support measures.
Bankers were meant to be wowed by measures such as the end of a cap on their bonuses and the scrapping of the 45pc top tax rate, but yesterday’s market meltdown has put paid to that.
Pound will tumble below €1, warns former US Treasury Secretary
Forget parity with the dollar – some experts think the pound will soon be less than €1.
Among them is former US Treasury Secretary Lawrence Summers, who’s published a Twitter screed about the gloom facing the British currency.
He brands last week’s mini-Budget “utterly irresponsible” and blasts both the Government and Bank of England for their lack of credibility.
“The magnitude of Britain’s trade current account deficit underscores the seriousness of its challenges,” he says. “My guess is that pound will find its way below parity with both the dollar and euro.”
A final warning from Mr Summers is that the pound crisis will affect London’s viability as a global financial center.
Pound rebounds after record low
Sterling has rebounded sharply after dropping to an all-time low on Monday as markets began to regain some composure.
The pound, which touched an all-time low of less than $1.04 yesterday, climbed 1.3pc in early trading to above $1.08.
Markets may have been reassured by yesterday’s statements from the Treasury and Bank of England, although Andrew Bailey’s insistence that the Bank wouldn’t hesitate was far from convincing for many.
Still, sterling isn’t out of the woods yet, with traders betting there’s more than a 40pc chance of it hitting parity with the dollar by the end of the year.
What happened in 1985 when the pound was last this low
The last time the pound was trading at these levels against the dollar Margaret Thatcher was halfway through the second term of her premiership, the miners’ strike was coming to an end and Eastenders had just debuted on BBC One.
Before this week, sterling’s nadir against the dollar came on February 26, 1985. Britain was, in many ways, far removed from the country it is today but with some enduring similarities.
On that wet and hazy Tuesday morning in the City of London, traders watched their screens as sterling tumbled, closing the day at $1.052 — a record low that held for more than 37 years.
Then, it was the overwhelming strength of the dollar, the world’s reserve currency, that drove sterling’s decline.
Read the full story by Simon Foy here
Markets doubt Bailey can avoid emergency rate rise
Andrew Bailey has failed to convince markets that he can avoid an emergency interest rate rise after the pound slumped to a record low.
In a statement issued on Monday evening, Mr Bailey insisted that although Threadneedle Street was “monitoring developments in financial markets very closely,” the Bank does not expect to take any action until its next scheduled meeting in November.
The intervention sparked a further slump in sterling, sending it back down by 1.7pc below $1.07.
Read the full story by Tim Wallace here
5 things to start your day
1) Markets doubt Bailey can avoid emergency rate rise after plunge in pound The Bank of England Governor has failed to convince traders that action can wait until November after the pound plunged on Monday.
2) Mortgage payments to surge by almost £10,000 a year if interest rates hit 6pc Markets are betting on a punishing series of rate rises that would pile pressure on hundreds of thousands of borrowers
3) Doncaster Sheffield Airport to close in blow for levelling up agenda Liz Truss previously pledged to “protect this airport and this infrastructure”
4) Ericsson keeps supplying Russia despite Ukraine invasion The Swedish telecoms company applied for exemptions after attack on Russia’s neighbour.
5) Britain should have a nuclear reactor fleet to rival France The case for atomic power to restore our energy system to peak fitness is clear, writes Dr Tim Stone.
What happened overnight
Stocks were mixed in Asia on Tuesday after closing broadly lower on Wall Street, where the Dow Jones Industrial Average fell into what’s known as a bear market.
Tokyo, Sydney and Shanghai advanced while Hong Kong and Seoul declined. US futures rose and oil prices also were higher.
Hong Kong stocks opened down on Tuesday morning, with the Hang Seng Index plummeting 0.09pc, or 16.49 points, to 17,838.65.
The Shanghai Composite Index ticked up 0.17pc, or 5.17 points, to 3,056.39, while the Shenzhen Composite Index on China’s second exchange added 0.31pc, or 6.08 points, to 1,955.08.
Economics: Consumer confidence (US), house price index (US)
Corporate: Ergomed, A.G. Barr (interim results)