Pound slumps to 37 year low

The mammoth economic challenges facing Liz Truss as she takes over as Prime Minister were laid bare earlier this week. Truss’s election as Tory leader coincided with a top Bank of England official signalling the need for ‘fast and forceful’ interest rate rises in the face of rampant inflation.

Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and did not rule out a 75 percentage-point increase from the Bank of England at the next meeting. Soaring energy bills and food prices, spurred by the war in Ukraine, have pushed inflation into double digits and one forecast suggests it could even top 20% in the new year. The Bank of England has responded by hiking interest rates and on Monday Mann backed the idea that forceful monetary tightening is superior to the current gradualist approach.

She said: ‘We need to act more forcefully now to ensure that the drift does not become the norm.’  

Truss’s victory also came as sterling dipped to as low as $1.1444 against the dollar, just a fraction above the level seen on March 20, 2020 when markets were gripped with fear over Covid-19 lockdowns. Before that, the pound had not been weaker against the dollar since 1985. At the start of the week a monthly purchasing managers’ index survey suggested that business activity shrank in August for the first time since lockdowns in February 2021 but there was a glimmer of positivity from separate industry figures showing that retail figures ticked 1% higher last month while new car sales edged up by 1.2%.

Piling further pressure on Truss as she looks for potentially costly solutions to the cost of living crisis is a growing headache over the Government’s £2.4 trillion debt pile. Higher inflation and investors losing confidence have combined to make the cost of servicing that debt higher. Deutsche Bank said the risk of a balance of payments crisis ‘should not be underestimated’. Shreyas Gopal, a Deutsche strategist, said that with surging inflation, weakening growth, and the possibility of an unfunded spending splurge and changes to the Bank of England’s inflation-targeting mandate, investor confidence could not be taken for granted.