Kwasi Kwarteng’s decision to bring forward his debt-cutting plan could help to calm markets and mean smaller future interest rate rises than would otherwise have been the case, according to the Conservative chair of parliament’s influential Treasury watchdog.
Mel Stride, a Tory MP and the chair of the Treasury committee, said moving the government’s fiscal statement to October from 23 November could restore some confidence, depending on the content of the plan and the detail of the new forecasts from the Office of Budget Responsibility.
The pound rose to a two-week high above $1.14 on Tuesday as Kwarteng prepared to announce an earlier date to set out his plans to cut debts. Stride said that if the plans were well-received, the Bank of England might opt for a smaller rate rise at its next meeting on 3 November.
The role of the fiscal statement is to “answer a critical question which is do all those proposals add up in terms of meeting some credible fiscal rules”, Stride said.
“If the forecast stacks up, then that will be critical in calming the markets, and the implications of that clearly are things like lower interest rate rises than would otherwise occur, which of course is going to matter to millions of people around the country when it comes to their mortgages,” Stride told BBC Radio 4’s Today programme.
The chancellor is bowing to pressure to bring forward his fiscal plan, after sweeping tax cutting plans in his mini-budget were uncosted, triggering market panic and widespread dismay within the Tory party. It is a second U-turn after he was forced to abandon plans to scrap the 45% top rate of income tax.
The price of UK government bonds also recovered on Monday, as the yield – or interest rate – on 10-year bond dropped below 4% to a one-week low.
The new timing of Kwarteng’s fiscal statement was also crucial, Stride said, as it should come ahead of the next meeting of the Bank of England’s rate-setting monetary policy committee.
If the statement is well-received by the financial markets, “then one would expect that to lead the monetary policy committee possibly to conclude that the pressures of inflation due to these currently unfunded tax cuts might be expected to ease a bit”, Stride said.
He added: “In those circumstances, you might expect the committee to come up with a lower level of interest rate rises, which of course will be very helpful for those with mortgages, and business borrowing and indeed for the cost of the government servicing its own debt.”
The government has so far declined to rule out reductions in public spending, or a real-terms cut in benefits, to pay for its tax-cutting plans.
Stride said he would have to “think long and hard” about whether to vote for only increasing benefits by less than inflation.
“We’re coming off the back of quite a strong real-term squeeze on those benefits already, so I think that will be a really tough call to make,” he added.
Senior Tory MPs have warned of further rebellions over the government’s plans to reduce public spending, especially on benefits.
