The pound has hit a fresh 37-year low against the dollar after Vladimir Putin announced he was calling up reservists to fight in Ukraine and accused the West of “nuclear blackmail”.
The move, which marks an escalation of the conflict, sparked a brief flight to safe haven assets such as the dollar.
The pound briefly touched $1.13040 – its lowest level since 1985 – before regaining ground.
Separately, figures showed UK borrowing costs hit a fresh record for August.
In a televised address, the Russian president said he had signed a decree on partial mobilisation – the first since World War Two – as he seeks to send up to 300,000 more soldiers into battle.
He also accused the West of wanting to destroy Russia, adding that the country had “lots of weapons to reply”.
The comments rattled investors who bought the dollar, gold and bonds, all of which are seen as less risky assets.
Traders in sterling – which has been at low levels for weeks – were also looking ahead to a widely anticipated interest rate rise by the Federal Reserve on Wednesday.
The US central bank has already raised interest rates four times this year to battle inflation. The Bank of England (BoE) is also expected to put up interest rates on Thursday as the UK faces its own cost-of-living crisis.
Jumpy investors
Sterling investors are also nervous about the policy implications of a planned mini-budget from the government on Friday, which will reportedly contain £30bn of tax cuts.
It comes as the UK borrows billions of pounds to cap energy bills for households and businesses, adding to the UK’s already large debt pile.
Official figures on Wednesday showed the government is also facing soaring interest payments on that debt due to rising inflation.
Interest due reached £8.2bn during the month – £1.5bn more than last year and the highest August figure since records began in 1997, the Office for National Statistics (ONS) said.
Meanwhile, total government borrowing – the difference between spending and tax income – was £11.8bn. That is twice the level forecast for August by the Office for Budget Responsibility, the government’s independent fiscal watchdog.
Martyn Beck, chief economic advisor to the EY Item Club and former Treasury economist, said the UK economy had been “pretty weak over the last few months”.
That meant less was being generated in taxes, while the government had to spend more on debt interest payments, he added.
But he said he was “not particularly” worried about the high debt levels, as the UK’s borrowing costs were “still pretty low” compared to long-term historical records.
Chancellor Kwasi Kwarteng defended the government’s decision to spend billions on helping families and businesses with their bills.
He added that government’s priority was to “grow the economy and improve living standards for everyone – with strong economic growth and sustainable public finances going hand in hand”.
“As chancellor, I have pledged to get debt down in the medium term,” he added. “However, in the face of a major economic shock, it is absolutely right that the government takes action now to help families and businesses, just as we did during the pandemic.”
