Markets warn pound slump could lead UK interest rates to triple by next year

London, Sep 26

The plummeting value of the pound has sent the interest rate on government debts to a 12-year high, with money markets now predicting the Bank of England base rate could almost treble to 6 per cent next year, media reports said.

The pound sterling tumbled to an all-time low of $1.03 against the dollar overnight before recovering to $1.07 in morning trading as traders priced in forecasts of a major intervention from Threadneedle Street to support the currency.

Traders expect the central bank to convene a meeting of its monetary policy committee (MPC) soon to hike interest rates from 2.25 per cent to 3 per cent before increasing them further at a scheduled meeting in November, The Guardian reported.

One analyst described the situation as "toxic", while another said investors had digested the implications of Friday's mini-budget.

A further rout of the British currency could take it below parity with the dollar and into uncharted territory on international exchanges, The Guardian reported.

It is understood the MPC, chaired by the Bank Governor, Andrew Bailey, will be reluctant to intervene when the defence of the currency is not among its responsibilities, instead focusing on its target of bringing down inflation to 2 per cent over the next two to three years, from 9.9 per cent in August.

However, several MPC members have highlighted the fact that a drop in the value of the pound can fuel inflation via the higher cost of imported goods and raw materials.

A rise in interest rates, if it shores up the value of sterling, could limit the pressure on inflation, though traders may interpret an emergency rise as a signal of panic at the Bank, prompting further selling.

Adding to concerns about the government's grip on economic policy, the cost of financing UK debts doubled on international bond markets. The interest rate on five-year government bonds raced to 4.5 per cent from 2 per cent last month and just 0.5 per cent a year ago, The Guardian reported.