- Proposals likely to increase inequality, says IMF
- BoE’s pill says a ‘significant’ response is likely
- Economists, executives call for a turnaround in politics
- The pound recovers slightly, up 0.4% on the day
LONDON, September 27 (Reuters) – The International Monetary Fund openly criticized Britain’s new economic strategy on Tuesday after another slide in bond markets forced the Bank of England to promise a “significant” response to stabilize the economy.
Incoming finance minister Kwasi Kwarteng was pressured to reconsider his policies, sparking turmoil in financial markets as leading economists, investors and executives said investor confidence would only regain a bottom if the plan were scrapped.
Britain’s new Prime Minister, Liz Truss, of the Conservative Party, took office on September 6 and said she wants to use deep tax cuts and deregulation to pull the economy out of years of stagnant growth.
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Kwarteng’s plan, which aims to support households and businesses with energy bills while doubling long-term economic growth. It will require an additional £72 billion ($77.17 billion) of government debt this fiscal year alone, shocking investors and driving up the cost of such borrowing even further.
The IMF said the proposals, which sent the pound to an all-time low of $1.0327 on Monday, are likely to increase inequality and call into question the wisdom of such policies.
“Given the heightened 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 conflict with monetary policy,” said an IMF spokesman.
“We are closely monitoring recent economic developments in the UK and are working with the authorities,” the spokesman said.
The IMF has a symbolic importance in British politics: its bailout of Great Britain in 1976 after a balance of payments crisis was long considered the low point in modern British economic history.
BUDGET
The fund said a budget due by Kwarteng on November 23 would give the UK government an “early opportunity to explore ways to provide more targeted support and to reassess tax measures, particularly those that benefit high earners”.
Earlier in the day, BoE chief economist Huw Pill said the central bank was likely to come up with a “significant” rate hike at its next meeting in November, adding that the financial market turmoil would have a big impact on the economy and feed into it next forecasts.
UK government bonds have sold off at a frenetic pace since budget plans sparked a crisis of confidence in Truss’s handling of the economy.
“It’s hard not to conclude that this will require a significant policy response,” Pill told the CEPR Barclays Monetary Policy Forum.
With analysts still speculating on Britain’s future financial direction and markets volatile, a growing number of mortgage lenders unable to price loans halted sales. Continue reading
REVERSE COURSE?
US economist Larry Summers, a former US Treasury Secretary, said skyrocketing interest rates on Britain’s long-term debt were a sign of lost credibility.
Virgin Atlantic airline chief Shai Weiss has urged the government to stabilize economic affairs and accept that a move to fund huge tax cuts with huge public debt has left Britain in a weaker position.
“All of us in this room should be humble enough to say, if I say something that doesn’t work, maybe I should reverse course, that’s not a bad thing,” he said at a news conference to announce an alliance with Skyteam.
With two years to go before the general election, the opposition Labor Party has a 17-point lead over the Conservatives, a level not seen in more than two decades, according to a YouGov opinion poll for The Times newspaper.
The Bank of England and the Treasury had issued statements on Monday afternoon hoping to reassure investors, with the central bank saying it would not hesitate to raise interest rates if necessary. Continue reading
However, that immediately pushed the pound further as some investors bet on an emergency rate hike. It recovered slightly on Tuesday, up 0.4% on the day to $1.0726 around 2006 GMT.
Kwaiteng met with top bankers, insurers and wealth managers on Tuesday and said he was “confident” his economic strategy combined with supply-side reforms would work. Continue reading
But many are not yet convinced.
“(There) is still no clear sign that the root cause of the problem — the government’s fiscal strategy — is being reversed or reconsidered,” said Allan Monks, economist at JP Morgan.
“This needs to happen before November to avoid a much worse outcome for the economy.”
($1 = 0.9330 pounds)
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Additional reporting by Kylie MacLellan and Muvija M; Edited by Catherine Evans and Grant McCool
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