Rock-bottom investor confidence in Britain will only recover with a U-turn of the economic plan announced last week by finance minister Kwasi Kwarteng, US economist Larry Summers and J.P. Morgan said.
The pound touched an all-time low of $1.0327 on Monday, British government bonds sold off at a ferocious pace and some mortgage providers, unable to price loans, suspended sales to new customers.
โThe first step in regaining credibility is not saying incredible things,โ Summers said on Twitter on Tuesday.
Summers pointed to surging interest rates of long-dated British debt as a โhallmark of situations where credibility has been lostโ.
โThis happens most frequently in developing countries but happened with early Mitterrand before a U-turn, in the late Carter Administration before Volcker and with Lafontaine in Germany.โ
On Monday the Bank of England and Treasury released statements in the hope of reassuring investors, with the central bank saying it would not hesitate to raise interest rates if needed.
Kwarteng also said he would set out medium-term debt-cutting plans on Nov. 23, alongside forecasts from the independent Office for Budget Responsibility showing the full scale of government borrowing.
Economist Allan Monks from Americaโs largest bank J.P. Morgan, said this intervention was โmeasuredโ.
โBut there is still no clear sign that the source of the problem โ the governmentโs fiscal strategy โ is being reversed or reconsidered,โ Monks said.
โThis will need to happen before November in order to avoid a much worse outcome for the economy.
The pound was trading at $1.0797 at 7.33 a.m. (0633 GMT).
