The bank, which hiked rates on Thursday, said it would fully review the government’s tax and spending commitments ahead of its next meeting in November and “will not hesitate to change interest rates as needed to keep inflation sustained for Q2.” % target returned in the medium term.”
Also on Monday, the UK Treasury announced that it would present a medium-term budget plan on November 23, along with an economic forecast from the independent Office for Budget Responsibility.
The statements did little to assuage concerns about the government’s economic policies as the pound fell to $1.0664 from $1.0857 after they were released. The pound had rebounded from its record low earlier in the day on expectations the central bank may take action to stabilize the currency.
The flagging pound is putting pressure on the new Conservative government, which has gambled on cutting taxes to boost economic growth while borrowing billions of pounds to help consumers and businesses struggling with soaring energy costs. Many economists say it’s more likely to fuel already-high inflation, depress the pound and raise the cost of the UK government’s borrowing – a potentially perfect storm of economic headwinds.
Kculteng has been criticized for not publishing an independent analysis of the plans as he announced the biggest UK tax cuts in 50 years.
The government plans to cut £45 billion ($49 billion) in taxes while spending more than £60 billion to limit energy prices that are causing a cost-of-living crisis.
Kmacheng and Prime Minister Liz Truss, who replaced Boris Johnson as prime minister on September 6, are betting that lower taxes and less bureaucracy will eventually generate enough additional tax revenue to cover government spending. Economists think gambling is unlikely to pay off.
Economic spokeswoman for the opposition Labor Party, Rachel Reeves, accused the government of “a return to trickle-down economics, an idea that has been tried, tested and failed”.
“They don’t gamble with their money — they gamble with yours,” she told an audience at the party’s annual conference on Monday.
The new and untried Truss also faces pressure from a nervous Conservative Party, which faces an election within two years.
Some Conservatives have hailed the tax cut measures as a return to free-market values after years of government intervention in the economy during the coronavirus pandemic. But others fear it is unconservative for the government to run up huge debts that taxpayers will ultimately have to pay.
Monday’s turmoil followed a 3% fall in sterling on Friday, the biggest one-day drop against the US dollar since Johnson announced the UK’s first Covid-19 lockdown on March 18, 2020. Before that, the pound lost more than 10% of its value immediately after the UK voted to leave the European Union in June 2016 before recovering.
A sense that a government is losing control has led some to compare current events to 16 September 1992 – ‘Black Wednesday’ – when a collapsing pound against a backdrop of high inflation forced the UK out of Europe Exit exchange rate mechanism, which was supposed to stabilize exchange rates. The UK took years to recover from the economic shock.
Kwarteng insisted the government was acting responsibly – and said more tax cuts were to come.
“We’ve only been here 19 days. I want to see people keep more of their income next year because I think it’s the British who are going to drive this economy,” he told the BBC.
As the government cuts taxes, the government plans to cap electricity and natural gas prices for homes and businesses to cushion price hikes triggered by Russia’s war in Ukraine, pushing inflation to a near 40-year high of 9. 9% have driven.
This scheme will cost £60 billion and the government will borrow to fund it, Kwarteng said on Friday.
He said on Sunday that this is the right policy because the government needs to help consumers who have been squeezed by the unprecedented pressure caused by the war in Ukraine and the pandemic.
Britain can afford the cost because its debt as a percentage of gross domestic product is the second-lowest among the major developed countries in the Group of Seven, Kwarteng said. He said the government will announce a “medium-term fiscal plan” to reduce public debt in the coming months.
Sterling is not the only currency showing weakness. The euro also hit a fresh 20-year low against the dollar as war in Ukraine stokes fears of recession and energy security ahead of winter.
While the pound’s slide has accelerated in recent days, the currency has fallen steadily against the dollar for more than a year as investors sought the safety of US assets amid global economic shocks.
The pound’s fall against the dollar was also fueled by the Bank of England’s failure to keep up with the US Federal Reserve’s efforts to curb inflation. Britain’s central bank hiked interest rates by half a percentage point on Thursday, compared to a large three-quarter-point hike by the Fed last week. But UK inflation is the highest among major economies, and the bank forecast that the UK could already be in a recession, which it defines as two consecutive quarters of economic contraction.
Many economists say the Bank of England may have to hike rates ahead of its Nov. 3 meeting if sterling continues to slide.
“There was this dramatic loss of confidence in the government’s management of the economy. But now the ball is in the Bank of England’s hands,” said Susannah Streeter, senior investment and markets analyst at financial services firm Hargreaves Lansdown.
