The UK is facing the threat of a "full-blown sterling crisis" after its currency plunged to an all-time low against the US dollar in the wake of Kwasi Kwarteng's tax-cutting Budget, reports said.

The pound was "absolutely hammered" in trading early Monday morning, dropping to just $1.0327 - under the grim 1985 baseline of $1.0545, which may prompt interest hike by the central bank.

Although much of the ground was clawed back, that appears to be due to expectations that the Bank of England will need to bring in an emergency interest rate hike, Daily Mail reported.

Bank of England
The Bank of EnglandIANS

Because many key commodities are priced in dollars, a weak pound drives inflation up further. Markets are now pricing in the headline rate reaching 6 per cent by next year, heaping more misery on families.

The cost of government borrowing also rose to the highest rate in a decade - causing another headache for Kwasi Kwarteng as he is using extra debt to fund tax cuts and the energy bills bailout.

However, the Chancellor is refusing to change course, with Downing Street saying there are no plans for him or Liz Truss to make statements reassuring the markets. Only yesterday Kwarteng promised there are more tax cuts in the pipeline, the report said.

Ministers have refused to comment on currency moves, but allies of Kwarteng were blaming "City boys playing fast and loose with the economy". "It was bound to happen. It will settle," one of the allies told the Times overnight.

British pound. (File: Xinhua/Then Chih Wey/IANS)
British pound. (File: Xinhua/Then Chih Wey/IANS)

Labour accused the government of putting the UK on the "highway to hell".

And there are signs of Tory disquiet, with former chancellor George Osborne warning that it is "schizophrenic" to try and have "small-state taxes and big-state spending".

Treasury committee chairman Mel Stride swiped at Kwarteng for insisting that there are more tax cuts to come on top of the huge 45 billion pound package announced on Friday.

"One thing is for sure - it would be wise to take stock of how, through time, the markets weigh up recent economic announcements, rather than immediately signalling more of the same in the near term," the Tory MP said.