The knee-jerk reaction in GBP early on Monday has since pared losses with the pound regaining ground after the European market open this morning. The slump in sterling could exacerbate the UK’s inflation problem with price levels currently flirting with double digits. More expensive imports may add to the UK’s upward price pressures, which is likely to prompt more aggressive action from central bank policy makers.
Following the Fed’s 75 basis point move on Wednesday, the Bank of England opted for a more moderate 50 basis point rise, which in light of the Chancellor’s mini-budget and the market fallout, feels like a mistake. It looks like an emergency rate hike is on the cards as the Bank of England scrambles to bring inflation back down closer to target and calm the currency crisis.
On top of that the market is pricing in an increased probability that the Bank of England will move more quickly to raise interest rates, also lifting yields and punishing bond prices.