FRANKFURT, Germany: Deutsche Bank analyst George Saravelos said the Bank of England must raise interest rates as early as next week to calm markets and restore credibility.

After UK finance minister Kwasi Kwarteng announced major tax cuts funded by public borrowing, UK bond yields surged to the highest single day increase in more than three decades, and the pound dropped 3 percent to a new 37-year low.

"A large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market" was needed, Saravelos stressed in a research note, adding that a decision by the central bank to reverse its planned sale of UK government bonds would worsen matters.

The bank must send a strong signal that it was willing to do "whatever it takes" to bring inflation down quickly and move real yields into positive territory, he said.