Inside the Bank’s battle to save Britain from a plunging pound

Britain’s currency is getting slaughtered on international markets as investors question the conviction of the Bank of England to keep raising rates.

Down nearly 10pc since the start of the year, the pound has ended up in an unenviable club of losers from the world’s new “reverse currency wars” – a term which refers to central banks’ efforts to support their respective countries’ international purchasing power.

Among major currencies, only Japan’s yen, Sweden’s krona and Norway’s krone have performed worse than sterling so far this year. Those, however, are united by their central banks’ hesitancy on increasing interest rates, which typically supports the value of a domestic currency by making it more lucrative to hold.

A weak pound threatens to drive up the cost of imports, piling more inflationary pain on households.

While some experts have recently dubbed the pound an “emerging market” currency, the battle to save sterling could be won relatively quickly.

At a speech last Monday, Catherine Mann, one of the newest members of the Bank’s Monetary Policy Committee (MPC), suggested a rapid increase in rates could prop up the pound, providing short-term economic relief.

The former global chief economist at Wall Street giant Citibank said going big on rates “reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a sterling depreciation”, and could be followed by subsequent easing later on.

Mann’s intervention represented a radical shift in tone for the Bank, defying claims that the present price crisis is beyond its control – including by Governor Andrew Bailey, who made headlines last month after saying he felt “helpless” to combat spiralling prices.

“[Pound strength] is one of the few things in the inflationary story that the Bank of England can actually do something about,” says James Smith, an economist at ING.

The currency has fallen 9.5pc against the dollar since the start of the year, while the yen has fallen 14.7pc. The krona and krone are 11pc and 11.4pc lower. Against a basket of global currencies, the dollar has risen about 7.1pc over the same period.

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