Ministers have been struggling to prevent a full-scale loss of financial market confidence in its economic strategy after the Bank of England’s decision to rule out an emergency rise in interest rates prompted fresh selling of the pound. Attempts by Threadneedle Street and the Treasury failed to repair the damage caused by Kwasi Kwarteng’s mini-budget last Friday, with sterling falling to a record low against the US dollar. Within minutes of the Bank saying that it intended to wait until November before responding to the recent turbulence, the pound had dropped two cents against the dollar and was within three cents of the record low of $1.03 hit in Far East trading overnight. Some mortgage lenders – including Halifax, the UK’s biggest home loan provider – temporarily withdrew their products as financial markets predicted the Bank would need to raise interest rates from 2.25% to 6% to restore confidence. Nomura, the Japanese bank, forecast that the pound would end the year below parity against the dollar while Paul Donovan, the chief economist at UBS global wealth management, said investors were inclined to see the Conservative party as a “doomsday cult”. In a sign that international policymakers are growing increasingly alarmed by the recent turmoil, Raphael Bostic, the president of the Atlanta Federal Reserve, warned the sell-off in the pound reflected rising uncertainty about the direction of the UK economy. The Bank raised interest rates by a half a percentage point to 2.25% the day before Kwarteng’s mini-budget on Friday and is nervous about inflicting too much pain on an economy it already considers to be in recession. But markets now believe that talking tough will not be enough and that official borrowing costs will need to rise sharply to reverse sterling’s slide – a squeeze that would wipe out any boost from the chancellor’s growth push and lead to soaring mortgage rates for millions of homeowners. Kwarteng also failed to reassure jittery markets with a promise that he would outline the government’s debt-reduction strategy in a statement at the end of November. The chancellor said the Treasury would not be announcing fresh plans for departmental spending even though rising inflation means money allocated across Whitehall a year ago now buys less. Conservative MPs were furious with Kwarteng and the prime minister, Liz Truss, with some mulling a further leadership challenge or the option of voting down the forthcoming finance bill. However, at the same time, there was extreme nervousness that it would be seen as talking down the pound even further, or could trigger such chaos that they would end up in an early general election. One Tory MP even said he wanted the party to enter opposition as “this madness has got to end”, while another said they had “never, ever known the parliamentary party so unmanageable”. Many former chancellors remained silent, but George Osborne broke cover to say that the Treasury’s move to commission the Office for Budget Responsibility (OBR) forecasts was “crucial to credibility”. In his statement, Kwarteng said an OBR assessment would accompany his medium-term fiscal plan on 23 November and a budget next spring. Rachel Reeves, the shadow chancellor, who addressed the Labour conference in Liverpool on Monday, said: “People are rightly worried about what these market movements mean for them and their families, and want to know what the government will do to fix the problems it created through its reckless borrowing. “But there is no time to waste – waiting until November is not an option. The government must also look again at the plans they put forward in their fiscal statement last week. It is unprecedented and a damming indictment that the Bank of England has had to step in to reassure markets because of the irresponsible actions of the government.” Nick Macpherson, once the Treasury’s top mandarin, said: “The markets now have sterling and gilts in its sights. There will be rallies followed by brief substantive lurches downwards.” Paul Dales, the chief UK economist at Capital Economics, said: “The initial reaction in the markets, with the pound falling again after it regained some ground, suggests that the issue may not be put to bed yet. “Either way, the end result will probably be interest rates rising sooner and further (perhaps from 2.25% to 5%) in the coming months.” In a statement, the Bank said: “As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, and act accordingly. “The MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.” Markets have become increasingly concerned about the prospects for the UK economy since the government announced plans on Friday to cut taxes by the largest amount in 50 years. Gilt yields – the cost the government pays for its borrowing – also soared to a 12-year high. Interest rates on 10-year government debt stood at 4.2% – up from 3.5% ahead of Kwarteng’s statement last week. Virgin Money, one of the lenders that temporarily withdrew its mortgage products, said in an email to brokers: “Following a number of changes in the market, we have made the decision to temporarily withdraw all our products for new customers at 8pm tonight.” Alastair George, the chief investment strategist at Edison Group, said: “Today’s Bank of England and UK government statements can at best be described as too little, too late. There is no rate increase today and speculators will enjoy the prospect of two months of Bank of England inactivity if the statement is taken at face value. “The pro-cyclical mini-budget is seen as counterintuitive to international investors in the UK who must be wondering if politicians understand the ramifications of policies which have triggered a meaningful sterling crisis. “Gilt yields and interest rate futures have jumped 1% since only Friday as traders expect the Bank to ultimately be forced to act to defend the currency – and at the expense of braking the domestic economy hard.”