Pound Sterling: The Bank of England says it will not hesitate to raise interest rates

Sterling has recovered following speculation that the Bank of England may act in response to the fall.

But it is important to note that the bank’s response may not involve raising the interest rate in the first place.

It may try to calm nerves with a statement saying it is monitoring markets and standing by to help. That’s the usual first step.

Or it can use its foreign exchange reserves, the rainy season fund, to buy up sterling on international markets, to increase its value. But that’s usually a very short-term solution – and while Britain has over £100 billion ($108 billion) in reserves, that’s less than many other nations.

That is why investors are increasingly betting that the bank will adopt an emergency interest rate increase ahead of its next scheduled meeting in November – perhaps by 1% or more.

That means investors may be more keen to put their money in the UK, boosting the pound, as returns will be higher. It will also reduce some of the additional inflationary pressure that economists fear that the mini-budget plans could trigger.

But the bank’s rate-setters will also be aware that such a move could be interpreted as a vote of no confidence in the chancellor’s plans

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