LONDON, Sept. 26 (Xinhua) -- The Bank of England (BoE) said on Monday it "will not hesitate to change interest rates as necessary" after the British pound tumbled to a new record low against the U.S. dollar.
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 United Kingdom's (UK) central bank said in a statement, dampening the prospects of an emergency rate rise to shore up the pound.
The pound tumbled more than 4 percent to trade as low as 1.035 U.S. dollar in early Asia trading, taking it closer to parity with the dollar, though the British currency later rose above 1.08 dollar. In the wake of the BoE statement, the pound slid again below 1.07 dollars.
Also on Monday, the UK Treasury said it will set out a medium-term fiscal plan in November, along with an Office for Budget Responsibility forecast.
The fiscal plan will provide further details on the government's fiscal rules, including ensuring that debt falls as a share of gross domestic product (GDP) in the medium term, the Treasury noted.
It remains to be seen whether the statements by the government and the BoE will be enough to ease the markets' fears about the government's fiscal policy, but the initial reaction in the markets suggests that the issue may not be put to bed yet, Paul Dales, chief UK economist at Capital Economics consultancy, said.
The big sell-off came after Chancellor of the Exchequer Kwasi Kwarteng on Friday unveiled his ambitious plan to cut taxes and boost economic growth. The 45-billion-pound package is the biggest tax cut since 1972.
Following the announcement, the pound fell more than 3 percent to a 37-year low against the dollar as investors worried that large-scale tax cuts would ramp up public borrowing, bring much fiscal uncertainty and push up already high inflation.
"Confidence in the UK is collapsing amid fears that the unfunded tax cuts and energy support package will send inflation and government debt soaring," Fiona Cincotta, a market analyst for British financial services provider City Index, commented.
Commenting on the huge market volatility, Kwarteng said on Sunday that there was "more to come." "I want to see, over the next year, people retain more of their income, because I believe it's the British people that are going to drive this economy," he said. The remarks further rattled markets.
The effects of the government budget, alongside dollar strength, pushed sterling to briefly touch an all-time low, Richard Hunter, head of markets at the British online investment service interactive investor, said.
"Concerns that the budget will pile further pressure on an already heavily indebted economy have led to accusations of fiscal indiscipline, and have also resulted in speculation that the Bank of England may have to make an emergency announcement in response," Hunter added.
