Sterling has recovered ground following speculation that the Bank of England might act in response its fall.
But it’s important to note the Bank’s response may not involve raising interest rates in the first instance.
It could try to calm nerves with a statement saying that it is monitoring markets and stands ready to help. That’s the usual first step.
Or, it could use its foreign currency reserves, the rainy day fund, to buy up sterling on international markets, to bid up it’s value. But that typically is a very short-term fix – and while the UK has over £100bn ($108bn) in reserves, that’s less than many other nations.
That’s why, increasingly, investors are betting that the Bank will enact an emergency rate rise, ahead of its next scheduled November meeting – perhaps of 1% or more.
That means investors might be keener to put their money in the UK, boosting sterling, as returns would be higher. It would also curb some of the extra inflationary pressures economists fear the mini-budget plans could unleash.
But the Bank’s rate setters will also be mindful that such a move might be interpreted as a vote of no-confidence in the chancellor’s plans