- BoE’s Pill says “significant” response expected
- Sterling stabilizes against the dollar
- Economists, executives request a policy U-turn
- Some Conservative lawmakers raise concern over policy
The Bank of England (BoE) is expected to implement a “significant” rate hike at its upcoming meeting in November after finance minister Kwasi Kwarteng’s tax cut plan released turmoil in financial markets, BoE Chief Economist Huw Pill said on Tuesday.
After the sterling hit a record low of $1.0327 on Monday, leading executives, investors, and economists had previously warned that low investor confidence in British assets would recover only if Kwarteng abandon the economic plan he outlined on Friday.
British government bonds have also sold off at a strong pace since the fiscal plans triggered a crisis of confidence in new Prime Minister Liz Truss’s handling of the economy.
Pill told the CEPR Barclays Monetary Policy Forum:
“It is hard not to draw the conclusion that this will require a significant monetary policy response.”
With analysts still speculating about Britain’s future financial direction, and markets volatile, an increasing number of mortgage providers, unable to price loans, halted sales.
U.S. economist Larry Summers, a former U.S. Treasury Secretary, said rising interest rates on long-dated British debt indicate that credibility had been eroded, adding that London’s viability as a global financial hub was at risk.
“My guess is that the pound will find its way below parity with both the dollar and euro … The first step in regaining credibility is not saying incredible things,” he said, after Kwarteng implied he wanted more tax cuts still.
Shai Weiss, head of airline Virgin Atlantic, advised the government to stabilize the country’s economic affairs and acknowledge that a move to fund sizeable tax cuts with massive government borrowing had left Britain in a weaker state.
While speaking at a press conference to declare an alliance with SkyTeam, he stated:
“All of us in this room should be humble enough to say that if I said something that is not working, maybe I should reverse course that is not a bad thing to do.”
Truss was appointed prime minister earlier in September by a vote of Conservative Party members – not the broader electorate – with a promise to revive the economy from years of slow growth with huge tax cuts and deregulation.
But Kwarteng’s economic plan, requiring an extra 72 billion pounds worth of government debt issuance in this fiscal year only, has surprised investors, pushing the costs of such borrowing even higher.
While most of her lawmakers have encouraged a return to the Thatcherite and Reaganomics doctrines of the 1980s, some are beginning to raise concerns about the impact it will have on the finances of the government, households, and companies.
Two years ahead of the general election, the opposition Labour Party currently has a 17-point lead over Truss’s Conservatives, a level not seen in over twenty years, according to a YouGov opinion poll for The Times newspaper.
Economy In Jeopardy
“I think we are in an extremely difficult situation,” Mel Stride, a Conservative lawmaker and chair of parliament’s Treasury Select Committee, told BBC Radio.
“There is much talk, understandably, about where the pound is, but I think the bigger concern is the bond markets and the fact that yields now have spiked so high. The country is in a very difficult position.”
Conservative lawmaker Huw Merriman, who like Stride supported Truss’s rival, former finance minister Rishi Sunak, in the race to become prime minister, said the winner seemed to be “losing our voters with policies we warned against”.
The Bank of England and Treasury had issued statements on Monday afternoon in the hope of regaining investor confidence, with the central bank saying it would not hesitate to hike interest rates if necessary.
That instantly knocked the sterling further, however, as some investors had predicted an emergency rate rise. It bounced back slightly on Tuesday and was up 0.5 percentage points on the day at $1.0740 at around 1400 GMT.
Charles Bean Former BoE deputy governor said he would have recommended an emergency move from the central bank.
“I think this is one of those occasions where it might have made sense (to call a meeting),” he told BBC radio. A “go big and … go fast”, strategy would be the suitable approach, he said.
Kwarteng vowed on Monday to begin medium-term debt-cutting plans on Nov. 23, alongside forecasts from the independent Office for Budget Responsibility indicating the actual size of government borrowing.
He met top bankers, asset managers, and insurers on Tuesday and said he was “confident” that his economic strategy would be effective when put together with supply side reforms. But many remain doubtful. Economist Allan Monks from America’s biggest bank J.P. Morgan, said the verbal intervention from Treasury and the BoE had been “measured”.
“But there is still no clear sign that the source of the problem – the government’s fiscal strategy – is being reversed or reconsidered. This will need to happen before November in order to avoid a much worse outcome for the economy.”