Pound hits fresh 37-year low after mini-budget rocks markets

Sterling fell to $1.077 in early trading when Asia-Pacific markets opened after the weekend, closer to parity with the US dollar.

The UK current account deficit, which includes the trade balance and the net income from foreign investment and transfers, had already widened to a record level this year. The jump in the cost of imported energy is adding to this deficit, which is pushing the pound down towards levels that make UK assets attractive to foreign buyers again.

Nouriel Roubini, the economist who predicted the 2008 financial crisis, warned bluntly that the UK was starting to be priced like an emerging market, and was heading back to the 1970s.

Krugman said a 1970s-style sterling crisis was unlikely to occur unless the Bank of England chooses to monetise the debt, rather than offsetting the fiscal stimulus with tighter monetary policy.

The Bank of England is expected to raise interest rates higher to combat the inflationary impact of the mini-budget, as a weakening pound drives up costs of imports. The money markets are pricing a doubling of UK interest rates to more than 5% by next summer.

After the mini-budget, the UK Debt Management Office plans to raise an additional £72bn before next April, raising the financing remit in 2022-23 to £234bn.