Kwasi Kwarteng’s decision to bring forward his haircut plan could help calm markets and mean lower rate hikes in the future than would otherwise have been the case, according to the Conservative leader of the influential parliamentary financial watchdog.
Mel Stride, a Tory MP and Chair of the Finance Committee, said the postponement of the Government’s financial report from November 23 to October could restore some confidence, depending on the content of the plan and the details of the Office of Budget Responsibility’s new forecasts.
The pound surged to a two-week high above $1.14 on Tuesday, as Kwarteng prepared to announce an earlier date to outline its debt reduction plans. Stride said if the plans were well received, the Bank of England could opt for a smaller rate hike at its next meeting on November 3.
The tax return’s role is to “answer a critical question, which is whether all of these proposals fit together in terms of meeting some credible tax rules,” Stride said.
“If the forecasts come true, this will be crucial to reassure markets and the implications of that are clearly things like lower rate hikes than would otherwise occur, which of course will affect millions of people across the country when it comes to their mortgages ‘ Stride told ` Radio 4’s Today programme.
The Chancellor bows to pressure to bring forward his fiscal plan after sweeping tax cut plans were uncalculated in his mini-budget, sparking market panic and widespread dismay within the Tory party. It’s a second reversal after being forced to scrap plans to scrap the top 45% tax rate.
UK government bonds also rallied on Monday as the yield – or interest rate – on 10-year bonds fell below 4% to a weekly low.
Chart of Government Bonds
The new timing for Kwarteng’s financial report is also crucial, Stride said, as it should come ahead of the next meeting of the Bank of England’s Monetary Policy Committee to set interest rates.
If the statement is well received by financial markets, “then one would expect that the monetary policy committee might conclude that inflationary pressures may be easing a little as a result of these currently unfunded tax cuts,” Stride said.
He added: “In these circumstances you can expect the committee to propose lower rate hikes, which of course will be very helpful for those with mortgages and corporate credit and indeed for the cost of the government’s own debt.”
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The government has so far refused to rule out cutting public spending or cutting benefits in real terms to fund its tax cut plans.
Stride said he would have to “think long and hard” about voting to only increase benefits by less than inflation.
“We’ve already had quite a lot of real-world pressure on those advantages, so I think this is going to be a really tough decision,” he added.
Senior Tory MPs have warned of further rebellion over the government’s plans to cut public spending, particularly welfare.
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