Financial markets are watching how the Bank of England responds to defend and forecast the British pound. A new round of rate increases appears likely after the pound collapsed following the tax cut announced by the Liz Truss administration on Friday. The crisis intensified on Monday, with the currency trading at its weakest level since 1971 against a strong U.S. dollar, as Finance Minister Kwasi Kwarteng signaled further tax reductions. Observers warned that a misstep could stoke fear even further. Former Bank of England Monetary Policy Committee member Martin Weale commented on the morning’s developments, underscoring the market’s anxiety about policy direction.
interest rate increase
Markets expect the Bank of England to raise the base rate from its current level of 2.25 percent, potentially reaching 4 percent by November and edging toward 6 percent by May of the following year. The first move may come soon, aimed at stabilizing the pound, which recently traded around 9.9 percent against the dollar, and at dampening inflation pressures.
Last Friday, the government signaled a radical tax cut that many described as the boldest in half a century. The move triggered a rapid fall in the currency and a crisis that policymakers must address promptly to restore confidence and financial stability. Analysts warned that the tax plan carries significant budgetary implications and could complicate the fight against inflation if not credible to markets. A notable observer cautioned that a policy experiment of this scale has rarely succeeded outside strong macroeconomic frameworks.
irrecoverable debt
The package described as a comprehensive mini-budget included numerous tax reliefs for individuals and businesses, along with changes to social contributions. In practice, the plan arrived without a fully independent examination of its long-term impact. The Office for Budget Responsibility is expected to publish an assessment of the policy’s effect on inflation and public finances by year’s end. Markets believe the borrowing requirements under the plan may be unsustainable without a credible fiscal framework, creating doubts about the government’s restraint and long-term credibility. Officials have stressed that the budget timetable remains unchanged, yet the timing of the OBR report is a point of concern amid ongoing volatility and the Bank of England’s mandate to restore fiscal discipline.
Complicating the picture, the pound’s weakness raises the cost of energy subsidies and other support measures, which are financed in euro and dollar terms. With energy bills tied to international prices, any depreciation makes subsidies more costly in local terms. Kwarteng has not commented on the immediate market reaction, and a government spokesperson reaffirmed that the budget plan will proceed as outlined.
loss of control
In Liverpool, where a Labour Party conference is underway, the Shadow Chancellor highlighted concerns about monetary independence. Critics argued that policy credibility has been eroded and described the current leadership as displaying elements of risk-taking that could endanger financial stability. They stressed that the government must restore public trust and demonstrate a clear, responsible roadmap for growth, fiscal responsibility, and monetary autonomy. The central bank remains the guardian of price stability, while politicians are urged to align on a credible plan that reassures markets and households alike.