The Bank of England has signalled it is ready to ramp up interest rates to shore up the pound as Chancellor Kwasi Kwarteng insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth.
After a day of turmoil in the markets on Monday which saw sterling slump to a record low against the dollar, the Chancellor sought to reassure City investors he has a “credible plan” to start reducing the UK’s debt mountain.
However, the Bank’s chief economist Huw Pill warned they “cannot be indifferent” to the developments of the past days – seen as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.
“It is hard not to draw the conclusion that all this will require significant monetary policy response,” Mr Pill said in a speech to the Barclays-CEPR International Monetary Policy Forum.
“We must be confident in the stability of the UK’s economic framework.”
We are confident in our long-term strategy to drive economic growth through tax cuts and supply side reform
After two days of big changes, the pound appeared to settle down on Tuesday, trading at around 1.08 dollars for most of the day, deviating only briefly with a two cent drop.
But it suffered another sudden drop around 5pm - plunging more than half a cent to just below 1.07 dollars in the space of about 30 minutes.
London’s top stock index, the FTSE 100, was subdued, trading up by less than 0.1% on Tuesday afternoon while gilt yields – reflecting the cost of Government borrowing – fell by around 3%, but were still more than a quarter higher than just a week ago.
But with some analysts predicting the base rate – currently standing at 2.25% – will have to rise to as high as 6% next year, some lenders began withdrawing some mortgages amid uncertainty over how far they will rise. Some 365 fewer mortgage deals were counted by Moneyfacts.co.uk on Tuesday than were available on Friday, as a range of lenders including Halifax and Virgin Money took products off the table.
The sell-off of sterling came after investors took fright over Mr Kwarteng’s mini-budget on Friday when he unveiled a massive £45 billion tax cut funded by Government borrowing.
At a meeting on Tuesday with institutional investors, the Chancellor reaffirmed his intention to explain how he will get debt falling as a percentage of GDP in a medium term fiscal plan to be published on November 23 alongside a new set of economic forecasts from the Office for Budget Responsibility.
He also emphasised the importance of the “supply side” reforms ministers will be setting out in the coming weeks, including his “Big Bang 2.0” reforms to further liberalise the financial market regulations, in supporting growth.
“We are confident in our long-term strategy to drive economic growth through tax cuts and supply side reform,” he told them, according to a Treasury readout of the meeting.
“We have responded in the immediate term with an expansionary fiscal stance on energy because we had to. With two exogenous shocks – Covid-19 and Ukraine – we had to intervene. Our 70-year-high tax burden was also unsustainable.
Chancellor @KwasiKwarteng met asset management & insurance firms where he reiterated the Government's commitment to fiscal sustainability.
Next month, he will set out a package of regulatory reforms for the UK’s financial services sector to drive growth & incentivise investment. pic.twitter.com/GvKZcC1g49
— HM Treasury (@hmtreasury) September 27, 2022
“I’m confident that with our growth plan and the upcoming medium term fiscal plan – with close cooperation with the Bank – our approach will work.”
His comments came amid reports that Liz Truss had initially resisted moves by the Treasury on Monday to announce the new medium term fiscal plan in order to calm the markets.
Government sources did not deny the Prime Minister and Chancellor had met to discuss the issue but insisted suggestions it had been an “argumentative” encounter and descended into a “shouting match” were wide of the mark.
Despite a calmer day on Tuesday, many Conservative MPs remain deeply concerned about the political fallout from the tumultuous start to Ms Truss’s premiership.
The Chancellor @KwasiKwarteng and I know what a great country this is.
Our Growth Plan will unleash our potential and deliver better jobs, more funding for public services and higher wages for the British people.
The action starts now. 🇬🇧 pic.twitter.com/UWJQ6wChaP
— Liz Truss (@trussliz) September 23, 2022
With a YouGov poll for The Times showing Labour opening up a 17-point lead, some MPs who did not support her in the leadership contest have privately questioned whether she is up to the job.
Mel Stride, the chairman of the Commons Treasury Committee, who backed Rishi Sunak for the leadership, said the party’s reputation on the economy was “in jeopardy”.
He said the country was in “an extremely difficult situation” with higher borrowing costs than Italy or Greece and that it was essential to rebuild confidence in the wake of the Chancellor’s “unfunded” tax promises.
“That really I think is the part that has spooked the markets, because those tax cuts have got to be paid for,” he told BBC Radio 4’s The World at One.
In a further blow, the International Monetary Fund also criticised the tax-cutting financial measures and said they will “likely increase inequality”.
In a statement, a spokesperson for the organisation said: “We are closely monitoring recent economic developments in the UK and are engaged with authorities.
“We understand the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.
“Furthermore, the nature of the UK measures will likely increase inequality. The November 23 budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners.”
Labour sought to turn the heat further up on the Government with leader Sir Keir Starmer accusing it of crashing the economy to offer tax cuts for the richest 1% in society.
In his keynote address to the party faithful in Liverpool, Sir Keir said the Government had “lost control of the British economy” and “crashed the pound”.
He added: “Not for you. Not for working people. For tax cuts for the richest 1% in our society.
“Don't forget. Don't forgive.”
The Labour leader said the Tories “haven’t just failed to fix the roof, they've ripped out the foundations, smashed through the windows and now they've blown the doors off for good measure”.