The Bank of England has said it “will not hesitate” to raise interest rates to shore up the value of sterling after a day of turbulent markets that saw the pound hit its lowest level in at least half a century has fallen.
Chancellor Kwasi Kwarteng has announced he will present the announcement of a “medium-term fiscal plan” to reduce debt following a negative reaction to his £45 billion tax cut package announced on Friday.
The Treasury Department said it will now be released on November 23, having previously been scheduled for the new year, and would provide further details on the government’s fiscal rules, including ensuring that debt as a percentage of GDP falls over the medium term.
At the same time, the Office for Fiscal Responsibility will release its updated forecasts for the current calendar, amid widespread criticism that there was no update when Mr Kwarteng unveiled his “growth plan” last week.
Bank of England Governor Andrew Bailey welcomed the Chancellor’s commitment to “sustainable economic growth” and the promise to include the OBR.
He said the bank’s monetary policy committee, which sets interest rates, would make a full assessment of the impact on inflation and sterling’s decline at its next scheduled meeting in November and then “act accordingly”.
“The MPC will not hesitate to change interest rates as needed to bring inflation back to the 2 percent target in a sustainable manner over the medium term, in line with its mandate,” he said in a statement.
The move is seen as an attempt to reassure the tagged, who were spooked by Mr Kwarteng’s bigger-than-expected plans for tax cuts, funded by a massive expansion in government borrowing.
Those concerns were only compounded by comments over the weekend from Mr Kwarteng, who suggested more tax cuts were on the way.
At one point it was thought that the Bank of England would be forced to intervene with an emergency rate hike amid fears that the pound could fall to par with the dollar.
Some analysts warned the bank’s and Treasury Department’s statements were “too little, too late”.
Alastair George, Edison Group Chief Investment Strategist, said: “There is no rate hike today and speculators will relish the prospect of two months of inactivity from the Bank of England if the statement is taken at face value.
For Labour, Shadow Chancellor Rachel Reeves warned the Government cannot afford to wait until November to set out its plans and that the public needs confirmation now.
“It is unprecedented and a damning indictment that the Bank of England has had to step in to calm markets because of government irresponsibility,” she said.
The pound fell a US cent to $1.06 after the governor’s statement but was still above record lows set Monday morning when it fell to $1.03 in early trading in Asian markets.
The London Stock Exchange was closed when the statement was released, so it remained unchanged.
Earlier, Downing Street had made it clear that the government would not let the market reaction deter it from its tax cut agenda.
The Prime Minister’s official spokesman said Britain had the second-lowest debt ratio in the G7 group of industrialized nations and the government’s plans were “fiscally sound”.
“As you know, the growth plan includes fundamental supply-side reforms to achieve higher and sustainable growth in the long-term and that is what we are focusing on,” the spokesman said.
The Treasury Department said ministers would finalize changes to the planning system, business regulations, childcare, immigration, agricultural productivity and digital infrastructure over the course of October and early November.
As part of this programme, Mr Kwarteng will outline a range of regulatory reforms over the next month to ensure the UK financial services sector remains globally competitive.
The Chancellor has previously brushed off questions about the response to his mini-budget – which outlined the biggest tax-cut scheme in 50 years – which was funded by a £72billion increase in borrowing.
Over the weekend he claimed the cuts – which include removing the top 45p tax rate – “benefit people across the income spectrum” and dismissed accusations that they had mainly helped the wealthy.
But Torsten Bell, the chief executive of the Resolution Foundation think-tank, said the fall in sterling would mean more expensive imports would lead to higher inflation and lower living standards by a further 1%.
At the same time, the rise in interest rate expectations had already added another £1,000 a year to the forthcoming increase in mortgage payments for the typical borrower.
“Last Friday’s growth plan was based on firm belief in the markets, but recent events suggest that markets do not share the same belief in the growth plan,” he said.
“This is a painful reminder that economic policy is not a game.”
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