Sterling higher as BoE, Treasury seek to calm markets, outlook remains cautious

By Samuel Indyk

LONDON (Reuters) -The British pound was higher against the dollar on Tuesday, a day after hitting a record low, as the Bank of England and UK Treasury attempted to soothe market concerns after the government announced a raft of unfunded tax cuts.

The battered pound hit an all-time low of $1.0327 on Monday, prompting calls for a big inter-meeting interest rate hike from the Bank of England, and although the bank and government acknowledged the turmoil in markets, they stopped short of any concrete action.

The BoE “will not hesitate” to raise interest rates if needed to meet its 2% inflation target, governor Andrew Bailey said on Monday. The BoE’s next scheduled monetary policy meeting is on Nov. 3.

“I think the statements from the Bank of England and the Treasury have helped the pound,” said Stuart Cole, head macro economist at Equiti Capital.

“The BoE saying it won’t change course has helped the recovery in sterling as it conveys a message that there’s no sense of panic at the central bank,” Cole added.

By 1423 GMT on Tuesday, the pound was up 0.7% against the dollar at $1.07645. It’s still down around 20% versus the greenback this year.

The euro was down 0.8% against sterling to 89.285 pence.

Still analysts remained cautious about the longer-term outlook for the pound and forecasts for the currency to reach parity against the dollar have become increasingly common.

“Sterling is not out of the woods by any means,” Equiti’s Cole said.

“The BoE are required to tighten interest rates which will exacerbate the slowdown in growth,” Cole added, comparing the situation to 1992 when interest rate rises failed to support the currency.

In remarks on Tuesday, BoE chief economist Huw Pill said the central bank is likely to deliver a “significant policy response” to the government’s tax cuts but that it should wait until its next scheduled meeting before making its move.

“My interpretation of Pill’s remarks is that they’re trying to avoid, as much as they possibly can, targeting the exchange rate or using interest rate hikes to defend sterling,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

“I think they are of the view that if there are fundamental forces which they cannot control, they shouldn’t try to control them.”

Pill voted with the majority to raise interest rates by 50 basis points at last week’s policy meeting.

BoE Policymakers Jon Cunliffe, Dave Ramsden and new member Swati Dhingra are all scheduled to speak later this week.

The BoE’s statement on Monday came just minutes after the UK Treasury announced that a forecast from the Office for Budget Responsibility and medium-term fiscal plan would be published on Nov. 23, in an attempt to ease concerns about the credibility of the new fiscal plans which sent the pound and gilts into a tailspin.

On Friday, finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing, pushing gilt yields to their highest in years in historic moves.

Two-year gilt yields had shown signs of a tentative rebound after a 100 basis point move higher in the two trading days since the mini-budget and were last down 2.5 basis points at 4.488%.

(Reporting by Samuel Indyk; Editing by Frank Jack Daniel and Jonathan Oatis)