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MNI INSIGHT: Emergency Hike Out Of Character For BOE

(MNI) London

The BOE's focus is on ensuring market functioning, not defending the currency.

Markets are alive with chatter about an emergency Bank of England rate hike following the plunge in sterling and gilts, but such a move would be out of character for the BOE, which aims to set policy based on a full appraisal of the economic outlook and has no interest in defending particular exchange rate levels.

Sterling hit an all-time low on Monday in response to Friday’s government announcements of unfunded spending and tax cuts, but, while the BOE would act to ensure market functioning it has no mandate for defending the currency. It is theoretically possible that Chancellor Kwasi Kwarteng could instruct the Bank to buy sterling, but the UK’s last attempt at intervention, when it defended the pound’s membership of the European Exchange Rate Mechanism in 1992, ended in expensive failure and its current stocks of international reserves would not long survive any tussle with speculators.

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Markets are alive with chatter about an emergency Bank of England rate hike following the plunge in sterling and gilts, but such a move would be out of character for the BOE, which aims to set policy based on a full appraisal of the economic outlook and has no interest in defending particular exchange rate levels.

Sterling hit an all-time low on Monday in response to Friday’s government announcements of unfunded spending and tax cuts, but, while the BOE would act to ensure market functioning it has no mandate for defending the currency. It is theoretically possible that Chancellor Kwasi Kwarteng could instruct the Bank to buy sterling, but the UK’s last attempt at intervention, when it defended the pound’s membership of the European Exchange Rate Mechanism in 1992, ended in expensive failure and its current stocks of international reserves would not long survive any tussle with speculators.

Keep reading...Show less