Bank of England says it won't hesitate to raise interest rates

The Treasury and the Bank of England tried to offer reassurances this afternoon. The thrust was clear: don't panic, we know what we're doing.

Privately among some Conservative MPs though, there's a fear the government doesn't.

And so politically, a tussle for perhaps the biggest prize of the lot: the mantle of economic credibility.

For years, this has been an Achilles' heel for Labour; pummelled by Conservative opponents labelling them fiscally incontinent; unable to restrain the urge to tax, borrow and spend.

But they are now attempting to turn that charge around on the Tories, and allow themselves to imagine this might be a moment - like Black Wednesday 30 years ago - where events spiral beyond the government's control and so mug ministers of reputations, never to properly return.

Others, though, counsel caution... this moment may pass; pressures may ease.

Plenty within Labour still see a landscape changing; a willingness to be listened to again.

What we are witnessing in the markets are the short term consequences of Friday's statement from the chancellor.

But there will be long term consequences too - that will shape the political debate between now and the next election.

We're closing up shortly, but here's a summary of what's been happening today:

• The day began with a sharp drop in the exchange rate of the pound against the US dollar - sterling fell to its lowest value in 50 years
• At the Labour party conference in Liverpool, the shadow chancellor Rachel Reeves said that the government had lost credibility and urged the government to act
• The chancellor stuck to his guns and refused to engage with questions about the government's policies

• Later, the Bank of England said it wouldn't hesitate to change interest rates to bring inflation under control, returning the annual rate of price rises (currently running at nearly 10%) to a 2% target

• Meanwhile, the Treasury confirmed it would set out a medium-term fiscal plan on 23 November, which will include a Office for Budgetary Responsibility (OBR) forecast (the raft of tax cuts announced by the chancellor on Friday did not come with an OBR report)
• The Treasury and Bank's interventions are both seen attempts to calm the markets, which have been in turmoil since Kwasi Kwarteng spoke last week

• A poorly performing pound means it will cost more to import many vital commodities - including oil and gas - as they are priced in dollars
• Several lenders, including Virgin Money and the Skipton Building Society, have withdrawn their mortgage offerings while new ones are created

Paul Strausa, a retired entrepreneur from Northampton, thinks years of low the interest rates have had an impact on the falling pound.

The 60-year-old says: “We should have been putting them up and now we’re paying the cost. America put their interest rates up so the dollar’s strong. We put ours up half a percent the other day, it’s nowhere near enough.

“Imports will get more expensive so we’ll suffer in that respect.”

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Paul says he’s trying to make changes and save money.

“I am actively trying to tell people to put lights off, don’t use the dryer, wait for a drying day, always use the washing machine with a full load and that’s a great way of saving money. I reckon with a few sensible things you can probably save 25% on your energy bills.

"I’m still drinking the same amount of beer, that’s never going to change, I don’t care if I’m penniless.”

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Bob Beezhold, a 71-year-old retired lorry driver from Northampton, says he’s not too worried about the pound falling against the dollar, adding "there nothing we can do about it".

“It’s down at the moment, but it could also come up again," he says.

"I have got a holiday booked for Christmas, but I was lucky I got my euros way in advance when it was up.”

He admits if he was just on a state pension he would be concerned, but for now doesn’t think the situation is too serious.

Bob added: “Financially, I haven’t got a problem.”

Exchange rates are determined by factors such as a country's economy, confidence in that and relative inflation rates.

In the case of an individual currency, supply and demand determines its price. Put simply: if demand for, say, the pound goes down, the pound's price does too.

Let's take a closer look at some of the factors that can increase, or lessen, demand:

• Economy: Successful economies have strong currencies because other countries want to invest there. They need the local currency to do so, pushing up demand and its value
• Savings: If the Bank of England raises interest rates, holding savings or investments in pounds becomes more attractive, so demand for sterling increases
• Prices: If UK goods are cheaper than those abroad, they are attractive to foreign businesses who need sterling to purchase them. This will tend to push up the exchange rate
• Public finances: The state of a government's bank balance, or how much debt it has, can also affect the exchange rate
• Speculation: The exchange rate is highly vulnerable to currency speculators, who buy and sell sterling based on expectations of future events

Read more here: Why has the value of the pound tumbled?

Also speaking on Radio 4's PM programme was Conservative peer Lord Frost, who has described the response to the mini-budget last Friday as "unwarranted" and an "overreaction".

The former government minister said he doesn't believe anything has gone wrong, given Prime Minister Liz Truss promised change and a different economic approach "to get us back to growth and away from stagnation".

Frost added that means a number of things have got to happen, including:

• raising interest rates "to get inflation under control"
• lowering taxes
• giving economic help "to get people through this period"
• structural economic reform and reducing spending in the medium term

He concluded:

Quote Message: So I think what we've seen in the last few days is unwarranted and an overreaction approach to some elements of that, you've got to look at the total package which is taking the country on a different direction to get us out of stagnation and get us back to growth."

So I think what we've seen in the last few days is unwarranted and an overreaction approach to some elements of that, you've got to look at the total package which is taking the country on a different direction to get us out of stagnation and get us back to growth."

The pound's value has dropped so precipitously because the markets have become "frightened by the government’s policies", according to a former member of the Bank of England's monetary policy committee.

Prof Martin Weale, an economist at King’s College London, told BBC Radio 4’s PM programme he believes market traders became further scared "by the sense over the weekend that this was only the first instalment of some tax cuts".

He said interest rates and long term government debt rising were not so much a concern when rates were low (between 1 and 2%), because it was arguable the economy "would grow faster than the national debt and you didn’t really have to worry" about government interest payments.

But Prof Weale argues that now this is "no longer true", the decision to cut taxes means taxes are "going to be higher" in the future.

"We do have to pay for it at one time or another," he said.

Quote Message: People are concerned that the government has no plan for bringing the national debt under control."

People are concerned that the government has no plan for bringing the national debt under control."

ContributorCopyright: Contributor

The falling pound could make things even more expensive in the UK… but for Brits earning money overseas it’s no bad thing.

Becky, a teacher working in the United Arab Emirates (UAE), says the fall in the pound is "great" for her as the money she is sending back to the UK is now worth more.

"It has certainly helped me save money," the 28-year-old from Dorset says.

"I’m trying to put money towards a house deposit and this has helped me to do that."

She says it has made her feel "less stressed" about the money she's spending in the UK.

Still with the News Channel panel, and there's a question on the struggling pound now, with Russ asking whether sterling is really struggling or if the American dollar - which it's being compared with - is doing very well.

Our economics correspondent, Dharshini David, says this is a very important point. She goes on to respond: What we've seen in recent weeks is dollar strength - that's been a theme that's impacted currencies around the world because that economy looks relatively better off than many others in terms of growth.

Also, their interest rates are rising at a faster rate, so far, so it is dollar strength. But if you look at the league table, the pound is one of the most impacted currencies, and that's because of what's going on in our home shores.

More on the questions that were put to our colleagues on the News Channel now.

This one's from Micah. She says: Can anybody explain how the interest rate on savings at the major banks isn't increasing despite the rates rising? Why don't savers benefit?

Tom Selby, a consumer finance and pensions expert at the investment firm AJ Bell, takes this one. He says savers should benefit - and if your bank isn't passing on the interest rate increase... you need to change your bank.

It's as easy as it's ever been now to switch banks - there are loads of great websites out there that can help you compare rates. It may be difficult to switch - because inflation is running so hot at the moment so realistically you're still going to be getting a negative return on your money - but shop around and switch banks. If you're able to do so.

Getty ImagesCopyright: Getty Images

1. Higher prices: A fall in the value of the pound against other currencies will increase the price of goods and services we import. Firms could pass on higher prices to customers.
2. Fuel bills: Oil prices are based on the dollar means that petrol and diesel could be more expensive. Although oil prices have been falling in recent weeks, drivers are not likely to see the benefit at the pump due to the slide in the value of the pound.
3. Stronger sales for UK firms who sell goods abroad: A cheaper pound makes it less expensive for people from around the globe to buy goods and services from British firms, making them more competitive.
4. Higher repayments for some mortgages: Some two million people in the UK on a tracker or variable rate mortgage could see their monthly costs going up even further as a result.
5. More expensive trips abroad: The plunge in the pound means that holiday money won't stretch as far on things such as hotels and meals out - especially in the US.

Want to know more? Here's a closer look at how a slide in the value of the pound could affect people and businesses in the UK day-to-day.

A statement that aims to reassure the markets is the traditional first step in these circumstances.

Buried within was a strong hint that faster, bigger interest rate rises are on the way.

The Bank talks of ensuring that demand and supply are balanced. Boost the former too quickly, that's when inflation rises.

And that's what most economists fear - and why they're bracing for interest rates to maybe top 6% next summer, to bring inflation down.

But this statement has done little to soothe the markets; there may be more to come.

We reported earlier that our colleagues on the News Channel were going to host a 'Your Questions Answered' - well, that's happening now.

One of the questions is from Rory, who asks why the government isn't going back on its tax-cutting mini-budget if the markets don't like it. We wouldn't need to borrow as much then, so wouldn't that able to stabilise the pound, he asks.

Patrick Reid, an expert in global currency markets, says simply that the answer is no. The damage is already done - "in a market sense". The trust - between the markets and government - isn't there at the moment, he adds.

A late afternoon double dose of attempted reassurance – firstly from the Treasury, and then from the Bank of England.

What's new from the Treasury is a timeline with dates attached.

So there'll be a series of statements from various cabinet ministers about ideas we heard about on Friday.

For instance, the Levelling Up Secretary Simon Clarke will have something to say about planning in England.

At some point next month there'll be details about regulatory reforms for financial services.

Expect a document, and perhaps a visit by the chancellor.

And then, in just under two months, a parliamentary moment - what's being described as the 'Medium Term Fiscal Plan' - and the Office for Budget Responsibility's number crunching.

And finally, a Budget in the Spring. In short, what the Treasury is attempting to say is this: don't panic, we know what we're doing.

Well, let's see what the markets do next.

The pound has fallen back to $1.06 after the Bank of England's statement.

Before the Bank's statement, the pound was valued at $1.07 - a rise from early this morning, when sterling had fallen to a record low at close to $1.03.

Here's the full statement from the governor of the Bank of England:

Quote Message: The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets.

The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets.

Quote Message: In recent weeks, the government has made a number of important announcements. The government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today. I welcome the government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances.

In recent weeks, the government has made a number of important announcements. The government’s Energy Price Guarantee will reduce the near-term peak in inflation. Last Friday the Government announced its Growth Plan, on which the Chancellor has provided further detail in his statement today. I welcome the government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances.

Quote Message: The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.

The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.