Bank says it will ‘not hesitate’ to intervene over market turmoil

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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 market turmoil that saw the pound hit its lowest level for at least half a century .

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Chancellor Quasi Quarteng announced on Friday that he would bring forward the announcement of a “medium-term financial plan” to reduce debt levels, following an adverse reaction to his £45bn package of tax cuts.

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The Treasury said it would now be published on November 23, earlier set for the new year, and would include further details on the government’s fiscal rules, including ensuring that the share of GDP in the medium term As debt falls.

Also the Office for Budget Responsibility will publish its updated forecast for the current calendar amid widespread criticism that there were no updates when Mr. Quarteng 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 promises to include 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 to bring inflation back to the 2% target permanently over the medium term,” he said in a statement.

The move will be seen as an attempt to reassure those marked by the unexpectedly large plans of Mr. Quarteng to cut taxes, funded by a massive expansion in government borrowing.

Those concerns were only heightened by comments by Mr Quarteng over the weekend that suggested more tax cuts were on the way.

At one point, it was thought that the Bank of England would be forced to step in with an emergency interest rate hike, amid fears that the pound could be pared with the dollar.

Some analysts warned that the bank and Treasury statements were “too little, too late”.

Alastair George, chief investment strategist at Edison Group, said: “There is no rate hike today and speculators will enjoy the prospect of two months of Bank of England inaction if the statement is taken at face value.

As for Labour, Shadow Chancellor Rachel Reeves warned that the government cannot afford to wait until November to determine its plans, and the public now needs reassurance.

“It is unprecedented and a damning indictment that the Bank of England has had to step in to reassure the markets because of the irresponsible actions of the government,” she said.

Speaking at a fringe meeting at Labour’s conference, he hit out at the chancellor over any delay: “Does he see what is happening in the financial markets? Have they seen the reaction to their financial statements on Friday?

“It’s completely irresponsible.”

The pound fell a US cent to $1.06 after the governor’s statement, but was above its record low on Monday morning when Asian markets fell to $1.03 in early trade.

The London Stock Exchange was closed when the statement was issued, so remained unchanged.

Earlier Downing Street had made it clear that the market reaction would not deter the government from its tax-cutting agenda.

The prime minister’s official spokesman said the UK had the second lowest debt-to-GDP ratio in the G7 grouping of major industrialized countries and that the government’s plans were “financially responsible”.

“The development plan, as you know, includes fundamental supply side reforms to deliver high and sustainable growth for the long term, and that is our focus,” the spokesperson said.

The Treasury said changes to the planning system, business regulations, childcare, immigration, agricultural productivity and digital infrastructure during October and early November will be determined by ministers.

As part of that programme, Mr Quarteng will next month outline a series of regulatory reforms to keep the UK financial services sector globally competitive.

The chancellor previously dismissed questions about the response to his mini-budget – which outlined the largest program of tax cuts for 50 years – funded by a £72bn increase in borrowings.

Over the weekend, he claimed the cuts – including eliminating the 45p top rate of tax – “favour the people on the income scale”, dismissing allegations he mainly helped the wealthy.

However, Torsten Bell, chief executive of the Resolution Foundation think tank, said a fall in sterling would mean more expensive imports that would feed in higher inflation and knock another 1% below living standards.

At the same time an increase in interest rate expectations had already added another £1,000 a year to the ensuing increase in mortgage repayment for the typical borrower.

“Last Friday’s growth plan was based on firm belief in the markets, but recent events show that markets do not share the same belief in growth planning,” he said.

“It’s a painful reminder that economic policy is not a game.”

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