The Bank of England has said it “will not hesitate” to raise interest rates to prop up the value of sterling after a day of turmoil on the markets which saw the pound slump to its lowest level for at least half a century.
Chancellor Kwasi Kwarteng announced he would bring forward an announcement of a “medium-term fiscal plan” to start bringing down debt levels following an adverse reaction to his £45 billion package of tax cuts set out on Friday.
The Treasury said it would now be published on November 23, having previously been slated for the new year, and will include further details on the Government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.
At the same time the Office for Budget Responsibility will publish its updated forecasts for the current calendar amid widespread criticism that there was no update when Mr Kwarteng set out his “plan for growth” last week.
Bank of England Governor Andrew Bailey welcomed the Chancellor’s commitment to “sustainable economic growth” as well as the promise to involve the OBR.
He said the Bank’s monetary policy committee, which sets interest rates, will make a full assessment of the impact on inflation and the fall in sterling, at its next scheduled meeting in November and then “act accordingly”.
“The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit,” he said in a statement.
The move will been seen as an attempt to reassure the marked which were spooked by Mr Kwarteng’s unexpectedly large plans for tax cuts funded by a massive expansion in Government borrowing.
Those concerns were only heightened by comments at the weekend by Mr Kwarteng suggesting that there were further tax cuts on the way.
At one point, it was thought that the the Bank of England would be forced to step in with an emergency interest rate hike amid fears the pound could drop to parity with the dollar.
Some analysts warned that the statements from the Bank and the Treasury were “too little, too late”.
Alastair George, chief investment strategist at Edison Group, said: “There is no rate increase today and speculators will enjoy the prospect of two months of Bank of England inactivity if the statement is taken at face value.
For Labour, shadow chancellor Rachel Reeves warned the Government could not afford to wait to November to set out its plans, and that the public needed reassurance now.
“It is unprecedented and a damming indictment that the Bank of England has had to step in to reassure markets because of the irresponsible actions of the Government,” she said.
The pound dropped by one US cent to 1.06 dollars following the governor’s statement, but was still above its record lows set on Monday morning when it fell to 1.03 dollars in early trading on the Asian markets.
The London stock exchange had closed when the statement was released, so remained unchanged.
Earlier, Downing Street made clear that the Government would not be deflected from its tax-cutting agenda by the reaction of the markets.
The Prime Minister’s official spokesman said the UK had the second lowest debt-to-GDP ratio in the G7 group of leading industrialised nations and that the Government’s plans were “fiscally responsible”.
“The growth plan, as you know, includes fundamental supply side reforms to deliver higher and sustainable growth for the long term, and that is our focus,” the spokesman said.
The Treasury said changes to the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure would be set out by ministers in the course of October and early November.
As part of that programme Mr Kwarteng will next month outline a series of regulatory reforms to ensure the UK’s financial services sector remains globally competitive.
The Chancellor earlier brushed off questions about the reaction to his mini-budget - which outlined the biggest programme of tax cuts for 50 years - funded by a £72 billion of increase in borrowing.
Over the weekend, he claimed the cuts - which include scrapping the 45p top rate of tax - “favour people right across the income scale”, rejecting accusations they mainly helped the rich.
However Torsten Bell, the chief executive of the Resolution Foundation think tank, said the fall in sterling would mean more expensive imports feeding through into higher inflation and knocking another 1% off living standards.
At the same time the surge in interest rate expectations had already added another £1,000 a year to the coming increase in mortgage repayments for the typical borrower.
“Last Friday’s growth plan was based on the firm belief in the markets, but recent events suggest that the markets don’t share the same belief in the growth plan,” he said.
“This is a painful reminder that economic policy is not a game.”
