George Saravelos, global head of foreign exchange research at Deutsche Bank AG, says that the Bank of England needs to unleash a sizable interest rate hike outside of its normal decision-making cycle.
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In a note released in the UK markets after the Chancellor of the Exchequer Kwasi Kwarteng made a statement on Friday, Saravelos said that the extraordinary step was needed to calm the markets. The view is of his own rather than the view of Deutsche Bank economists.
The market is giving very strong signals that it is no longer willing to fund the UK's external deficit position at the current configuration of UK real yields and exchange rate, according to Saravelos. The policy response required to what is going on is clear: a large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market. READ MORE: UK s Biggest Tax Cuts Since 1972 - Trigger Crash in Pound, Bonds
Saravelos also called for a strong signal from the bank that it is willing to do whatever it takes to bring inflation down quickly and real yield into positive territory. In the wake of Kwarteng's statement, the pound fell below $1.09 for the first time since 1985, sliding 3.3% in addition to declines earlier in the week. Borrowing costs on five-year government bonds jumped more than 50 basis points, the most in record for a single day, while the 10 year yield soared 33 basis points. In November, traders fully priced in a 100 basis-point rate hike from the BOE, double the size of the move announced on Thursday that took rates to 2.25%.
Canceling the bank's bond sales plan, announced yesterday, would be counterproductive and lead the central bank dangerously close to a path of fiscal dominance, a situation where large fiscal spending and their consequences higher yields dominate the central bank's primary inflation objective, according to Saravelos. How Neuroscientists use Brain Breaks to boost Creativity at Work?