Markets took fright after the Chancellor signalled at the weekend that he was ready to slash taxes even more than the £45 billion cuts in his mini-budget.
Sterling crashed to its lowest level against the dollar since decimalisation in 1971, down by more than four per cent to just $1.03 in early trading in Asia before regaining ground to about $1.07 when markets opened in the UK.
After Mr Kwarteng’s high-octane gamble, piling an extra £72 billion of debt on Britain to fund his tax cuts and energy bills support package, speculation was growing that the Bank of England’s Monetary Policy Committee might have to intervene with an emergency interest rate hike to prop up the pound.
Labour called for the City’s regulator to investigate whether possible mini-budget leaks, including seemingly of the cut to the 45p top rate of tax, allowed hedge fund managers to make huge profits by shorting the pound.
Government sources suggested Mr Kwarteng was remaining calm, with the view that markets regularly move up and down. Asked on ITV’s Good Morning Britain how much extra he was intending to borrow, his Cabinet colleague Chloe Smith said: “We will see for a little while, I’m sure some volatility.”
She added: “What we are really focused on doing is securing growth.”
But Mel Stride, Tory chair of the Commons Treasury Committee, criticised Mr Kwarteng’s weekend comments.
He tweeted: “It would be wise to take stock of how through time the markets weigh up recent economic announcements rather than immediately signalling more of the same in the near term.”
After the pound plunged, the gilt rate for the Government to borrow over 10 years rose above four per cent, potentially blowing a multi-billion pound hole in the public finances for an economy which the Bank of England says may already be in recession.
Capital Economics suggested one option for the Bank would be to immediately hike interest rates by between one percentage point and 1.5, with some markets already reportedly pricing in a 0.75 rise within a week.
An interest rate hike would pile more economic pain for millions of families, hitting them with higher mortgage payments. A weaker pound also fuels the cost of imports, deepening the cost-of-living crisis.
The Liberal Democrats called for Parliament to be recalled to debate the crisis, with mutterings among some Tory MPs that new Prime Minister Liz Truss could face unrest among her backbenchers if the Pound reaches parity with the Dollar.
Some Tory MPs believe Mr Kwarteng’s cuts, which analyses say will benefit the wealthy most, will lead to them haemorrhaging support in the so-called “Red Wall”.
The Chancellor claims the cuts will “favour people right across the income scale”.
Amid suggestions of a leak of the 45p tax rate cut, shadow City minister Tulip Siddiq said: “The Financial Conduct Authority should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative Government to their wealthy friends contributed to the collapse of the Pound.”