The Bank of England has suggested that it is prepared to increase interest rates in response to the drop in the value of the pound.

Huw Pill, the Bak’s chief economist, said that a “significant monetary policy response” is needed to protect sterling following the chancellor’s announcement that there will be a series of tax cuts.

Speaking at the International Monetary Policy Forum yesterday, Pill said the Bank was “certainly not indifferent to the repricing of financial assets that we have seen”.

A pledge of further tax cuts by chancellor Kwasi Kwarteng and worries about higher interest rates knocked investors’ confidence and saw the pound touch a record low against the dollar on Monday.

Experts now forecast that interest rates could reach 5.5% or even higher by next spring, prompting lenders such as Santander and Virgin Money to pull mortgage deals because of the lack of certainty on how far they might go.

Pill, who sits on the Monetary Policy Committee (MPC), which sets interest rates, said yesterday: “I do want to flag clearly at this point that in my view the combination of fiscal announcements that we’ve seen will act as a stimulus.

“It is hard not to draw the conclusion that this will require a significant monetary policy response.”

Pill fears that borrowers will pay a major price for the government’s £45bn mini-budget spree.

Some economists think base rates will peak at more than 6% next year, twice as high as expected just weeks ago.

Rightmove has issued a stark waning if mortgage rates were to increase to 6%.

An interest rate rise to 6% would hurt homeowners, says Rightmove