Pound's Plummet Raises UK Economic Alarms

The British pound faced its sharpest decline since July, burdened by increased public borrowing and a stagnant interest rate decision by the Bank of England. Finance Minister Rachel Reeves confronts a fiscal dilemma as current economic policies strain under potential tax hikes and inflationary pressures.

The British pound is on the verge of its most significant two-day slump since late July, coinciding with a rise in bond yields following increased UK public borrowing and the Bank of England's rate decision. Official figures revealed public sector borrowing hit 83.8 billion pounds between April and August, surpassing Office for Budget Responsibility forecasts by 11.4 billion pounds.

This surge complicates Finance Minister Rachel Reeves's November budget, as she considers tax hikes to adhere to fiscal regulations and stabilize financial markets. "The pound has fallen sharply and is testing support at $1.35," noted XTB research director Kathleen Brooks. Sterling's drop has been the second-largest in the G10 FX arena today.

While the Bank of England held interest rates unchanged, the decision to slow bond sales reflects concerns over the volatile bond market. Inflation, nearly double the BoE's 2% target, restricts further rate cuts to bolster the economy. UK bond yields, which rose with 30-year gilts climbing 4.3 basis points to 5.547%, highlight growing economic pressures amidst an uncertain labour market.

(With inputs from agencies.)