Vasi Kwarteng will step up efforts to reassure the city of its economic plans after the International Monetary Fund (IMF) criticized the government’s strategy – and the pound fell further on Wednesday.
Following a suggestion from the Bank of England, the chancellor is under pressure to reassure the markets that a faster rate hike could be on the way.
Representatives from Bank of America, JPMorgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg will attend a meeting with Mr. Quarteng on Wednesday after days of turmoil, including after his mini budget for the pound. An increase in buffet and government borrowing costs was seen. His package of tax cuts and increased borrowing shook the market.
In an extraordinary statement, the IMF said it was “closely monitoring” the UK and was in contact with officials, urging the chancellor to “re-evaluate tax measures”.
It warned existing plans, including eliminating the 45p rate of income tax for people over £150,000, were likely to increase inequality.
The 23 November budget will present an early opportunity for the UK government to consider ways to provide more targeted aid and to reevaluate tax measures, particularly those that benefit higher income earners
The move came as the Bank of England signaled it was prepared to raise interest rates significantly to shore up the pound and hedge against increased inflation.
The pound fell further on Wednesday morning, falling back to US$1.06 after reaching US$1.08 on Tuesday.
The FTSE 100 index also fell sharply since Wednesday’s opening, falling more than 100 points to 6872.7 – a 1.6% drop – following an overnight market slump in the US
The chancellor insisted he was “convinced” that his tax-cutting strategy would deliver on the promised economic growth.
Sterling fell to a record low against the dollar on Monday before recovering and the chancellor tried to convince investors in the city that he had a “credible plan” to ease the UK’s mountain of debt.
But the IMF said in a statement: “We understand that the announced large fiscal package is intended to help families and businesses cope with the energy shock and spur growth through tax cuts and supply measures.
“However, given the increased inflationary pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this time, as it is important that fiscal policy does not serve objectives contrary to monetary policy.
“Moreover, the nature of the UK’s measures will exacerbate inequality.”
It urged Mr Quarteng to come back to parliament in November with a package to show how he would get public finances back on track.
The IMF said, “The November 23 budget will present an early opportunity for the UK government to consider ways to provide more targeted aid and to reevaluate tax measures, particularly those that benefit those with higher incomes. “
Responding to the criticism, a Treasury spokesman said: “We have acted swiftly to protect homes and businesses during this winter and the next, following the unprecedented energy price hike caused by Putin’s illegal actions in Ukraine.”
The government was “focused on growing the economy to raise the standard of living for all” and the chancellor’s statement on 23 November “will set further details on the government’s fiscal regulations, including ensuring that debt GDP (gross domestic) product) in the medium term”.
Labor leader Sir Keir Starmer, fresh from a party convention where his party positioned itself as a waitress in government, said the IMF’s rebuke should not be ignored and urged Mr Quarteng to change course.
On BBC Radio 4’s Today programme, he said the economy had suffered “self-inflicted” wounds, adding: “This is the worst of all situations for our country to find itself in.
“Instead of coming down on the International Monetary Fund and downplaying it, the government needs to come forward and urgently review the plans it laid out last Friday.”
The Liberal Democrats have also called on Parliament, which is currently in convention recess, to be recalled to fix what the party has called a “mess”.
Bank of England chief economist Hugh Pill warned Threadneedle Street “can’t be indifferent” to developments in the past, seen as a sign that borrowing costs would have to be raised to protect the pound, and on inflation. The lid must be kept.
“It is difficult to conclude that all of this will require a significant monetary policy response,” Mr. Pill said.
Former US Treasury Secretary Larry Summers told Newsnight that Britain was facing a “very ominous” combination of factors.
“I honestly can’t remember a time when policy announcements from a G-7 country received such a negative response from both markets and economic experts,” he said.
An increase in the interest rate can increase mortgage costs and make it more expensive for a business to borrow.
Some analysts are predicting that the Bank of England’s base rate, which currently stands at 2.25%, will have to rise to 6% next year, with some lenders starting to withdraw mortgage products amid the uncertainty.
The crisis began on Friday when Mr Quarteng unveiled a massive tax cut of 45 billion pounds funded by government borrowing.
In meetings with investment banks on Wednesday, the chancellor is expected to emphasize the importance of reforms that will be instituted to spur growth in the coming weeks, including his efforts to further liberalize financial market regulation. Contains the “Big Bang 2.0” measure.
Despite some unease among Tory MPs about the market chaos, Truss’s backbench aides insist she must persevere and remain committed to her plan.
“My message today is that the main threat to the government for the year ahead is recession, not inflation,” Sir John Redwood told Sky News.
Credit: www.standard.co.uk /