Sterling has plunged by more than 1% after Bank of England governor Mark Carney signalled interest rates could be cut over the summer to help boost the UK economy.
The pound dropped 1.5% against the US dollar at 1.324, after Carney said in his view the cost of borrowing should be cut from 0.5%.
However, he said the decision would not be his to take alone and the final call would be made by the Monetary Policy Committee (MPC) during its inflation report in two weeks’ time.
He also hinted that the Bank could pump more cash into the economy under its quantitative easing programme and said the Financial Policy Committee could take action when it meets next Tuesday.
His comments fuelled impressive gains on the FTSE 100 Index, which surged to its highest level for nearly a year, closing 2.3% up at 6504.3.
Carney’s remarks are a far cry from the MPC’s view before the EU referendum when it was predicted the next move for interest rates would be a rise rather than a fall.
He said Britain was grappling with “economic post-traumatic stress disorder” following the vote to leave the European Union.
He also revealed that the Bank would take further action to ease uncertainty by providing “additional flexibility” in its provision of liquidity insurance by continuing to offer Indexed Long-Term Repo operations on a weekly basis until the end of September.
It comes after he stepped in to calm UK financial markets within minutes after the Brexit decision by pledging to pump in at least £250 billion if needed to prevent a credit squeeze.
In an effort to offer more words of reassurance, Carney said “the UK can handle change”, adding: “It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law.
“Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well.”
He said: “Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well.”
However, he also warned that “as a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise”.
The Bank of England is expecting UK gross domestic product to hit 2% this year as it comes under fire from increased uncertainty caused by Brexit.
Many say that it was Carney’s speech that shifts the markets. As it goes usually, when a central bank openly states that they will impose monetary policy, or quantitative easing he markets shift in ways that are positive or negative.