Business Secretary Jacob Rees-Mogg tried to blame the Bank of England rather than the UK’s economic policies for the financial market turmoil since the government set out its plans last month.
The pound slumped to a record low against the dollar in the days after Chancellor of the Exchequer Kwasi Kwarteng’s Sept 23 announcement of the biggest set of unfunded tax cuts in half a century. The central bank was then forced to intervene to stave off a collapse in part of the pensions industry.
But on Wednesday, Rees-Mogg pointed the finger of blame at the 50 basis-point rise in interest rates on Sept 22 -- which failed to keep pace with the US Federal Reserve’s 75-point increase a day earlier -- as the cause.
The comments echo a line of attack from Prime Minister Liz Truss’s leadership campaign over the summer, in which her team repeatedly accused the central bank of acting too slowly to tackle inflation. Now that debt costs are soaring, ministers have been trying to distance the government from the knock-on effect of rising mortgage rates, saying the Bank of England -- and global economic factors including higher US interest rates -- are responsible.
Interest rates “are rising globally in the face of Putin’s appalling war in Ukraine,” Truss told the House of Commons on Wednesday in only her second session of prime minister’s questions since taking power in early September. She tried to shift the focus onto her government’s support for people on rising energy costs, rather than the tax cuts that have triggered so much criticism.
Her Conservative government is facing a crisis of credibility, especially as Kwarteng’s package of measures was pilloried by the International Monetary Fund, opposition parties and Tory rebels. Economists have widely slammed the tax cuts as inflationary, at a time when the BOE is battling to rein in prices that are rising at near a 40-year high.
Final Straw
Markets are worried about consistency because fiscal and monetary policy are moving in opposite directions, Sanjay Raja, chief UK economist at Deutsche Bank, told Parliament’s Treasury committee on Wednesday. Kwarteng’s Sept 23 statement was “the straw that broke the camel’s back,” he said.
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The pound -- which had recovered since the central bank intervention -- came under renewed pressure after Bank of England Governor Andrew Bailey on Tuesday reiterated that the BOE will end emergency gilt purchases as planned at the end of this week. That sent the pound at one point to below US$1.10 ($1.58) for the first time this month and the yield on 30-year gilts to as much as 4.92%. The pound on Monday was up 0.9% at US$1.1061 as of 12.16 pm.
“The pound and other currencies have been falling against the dollar because interest rates in the US have been rising faster than they have in other markets,” Rees-Mogg told BBC Radio on Wednesday.
Speaking to the Treasury Committee, Resolution Foundation chief Torsten Bell said it’s precisely because of higher global interest rates that the government’s economic approach is the wrong one. “It’s very clear there’s a very UK-specific element to what’s going on” in financial markets, he said.
£60 Billion Hole
Truss has already been forced to backtrack on one of the flagship measures announced by Kwarteng -- a plan to scrap the highest rate of income tax, levied on the country’s top earners.
But with her party sinking in the polls and continued pressure on the pound and bonds, her administration now faces the challenge of explaining how it’ll pay for its economic strategy.
Adding to Truss’s woes, economic data on Wednesday showed output unexpectedly fell in August for the second time in three months, raising the possibility that the country is now in a recession. Rees-Mogg cautioned that monthly GDP data are often revised, while also saying the figure from the month before Truss came to power shows “why it was so important to have the mini-budget in September” in order to “get back on to a growth path.”
Kwarteng has pledged to unveil a medium-term fiscal strategy on Oct 31, alongside a set of economic forecasts from the government’s independent watchdog, the Office for Budget Responsibility. He brought the date forward from late November in a bid to calm markets. The influential Institute for Fiscal Studies on Tuesday estimated Kwarteng will need to find savings of at least £60 billion ($95.33 billion) to shore up confidence.
“I don’t think there is a plausible credible package that’s going to work on the 31st now that doesn’t involve U-turning” on more measures, Bell said. “Markets are going to need to see ‘I’ve changed course’.” He picked out the government’s cancellation of a planned corporation tax rise next year as one possible reversal.
