Pounds hits a two-year low against the dollar:

The pound hit a fresh two-year low against the dollar as Britain’s political crisis along with the outlook for interest rates and inflation sparked more turmoil on financial markets.

With Westminster and the City engrossed in Boris Johnson’s future, sterling fell as low as $1.1877, a level not seen since the pandemic struck in early 2020.

The latest slide – taking the pound’s losses this year to 12 per cent – came as Bank of England deputy governor Jon Cunliffe vowed to do ‘whatever is necessary’ to return inflation to the 2 per cent target, after it hit a 40-year high of 9.1 per cent.

Runaway inflation and fears of recession have rattled markets around the world, pushing the US dollar higher against global currencies.

And while the pound was down against the dollar, it climbed more than half a cent against the euro, to over €1.17. The single currency crashed to a fresh 20-year low against the dollar, diving close to parity.

As the crisis in Downing Street mounted, new chancellor Nadhim Zahawi raised the prospect of tax cuts to boost the economy.

But he added that his priority was to fight inflation which looks set to hit 11 per cent this year when the energy price cap rises again.

‘We have just come out of the equivalent of a world war,’ he said, hours after succeeding Rishi Sunak at the Treasury. 

‘We have to rebuild the economy and return to growth. The important thing is to get inflation under control, be fiscally responsible.’

The outlook for sterling looks far from clear given the chaos on Westminster and darkening outlook for the economy.

Jane Foley, head of FX strategy at Rabobank, said the pound could rally if Johnson is replaced by ‘strong leadership less distracted by scandal and sleaze’.

This week, the Bank of England warned the economic outlook for the UK and the rest of the world had ‘deteriorated materially’.

Yesterday, Cunliffe told the BBC the Bank would do ‘whatever is necessary’ to ensure the price shock caused by oil and commodity market turmoil does not turn into a ‘persistent domestically generated inflation problem’.

Huw Pill, the Bank’s chief economist, said that he was in the ‘price stability business’ and that acting to achieve the 2 per cent inflation target was ‘more important than ever’. 

But he warned: ‘We’re not expecting really to see any growth in the economy over the next year or so.’

That downturn, driven by Britain’s cost of living squeeze, would by itself act to cool inflation. 

He said he preferred a ‘steady-handed’ approach on raising interest rates, and added: ‘One-off, bold moves… can be disturbing in terms of their impact on financial markets.’

Julian Jessop, an economist at the Institute of Economic Affairs, said: ‘The Bank’s slow response to the surge in inflation has undermined credibility and increased the risk that monetary policy will eventually have to be tightened a lot further.’