Markets remain “febrile” and the medium-term fiscal plan set for next Monday will be crucial for investor clarity over the UK’s fiscal policy and wider economic context, a senior Bank of England official warned on Monday.
Gilts rallied sharply on Monday after Rishi Sunak was confirmed as Britain’s next prime minister. Economists see him as likely to broadly endorse the fiscal tightening planned by chancellor Jeremy Hunt, relieving pressure on the central bank to raise interest rates aggressively to curb inflation.
But Dave Ramsden, BoE deputy governor for markets and banking, told the House of Commons Treasury select committee that government borrowing costs were still higher than before September’s “mini” Budget.
He added that “things have not settled down yet” because of political events but also uncertainty over the monetary and fiscal outlook.
“Credibility is being recovered, at least on that benchmark measure, but that has to be followed through,” he said, adding that a return to “stability around policymaking and around the framing of fiscal events will be really important”.
If Sunak confirms the current plan for a Halloween statement, with accompanying forecasts from the Office for Budget Responsibility, the independent fiscal watchdog, the BoE will have three days to assess the implications before its next interest rate decision.
In September, the Monetary Policy Committee met to set policy just a day before then chancellor Kwasi Kwarteng’s “mini” Budget upset markets, with policymakers unable to take into account the effect his package of unfunded tax cuts would have on inflation.
Ramsden, who spent much of his career as a Treasury civil servant, said this sequencing was unusual, while the framing of the event — with no accompanying economic or fiscal forecasts — had been “unprecedented”.
“Getting clarity about the fiscal arithmetic and wider economic context as the OBR sees it will be really important. If that is available by next Monday, that will be really important,” he said, while underlining it was for the government to decide the fiscal statement’s content and timing.
Ramsden said BoE staff were already liaising with Treasury officials about the factors that would influence the OBR’s forecasts. He said a key element would be the form the government’s energy price guarantee took, following Hunt’s announcement that it would become more targeted from next April.
Although he has consistently been among the more hawkish members of the MPC, voting against the majority for a 0.75 percentage point increase in interest rates in September, Ramsden did not give any new steer on the scale of tightening he would favour next week.
Instead, he said the MPC was “acutely aware” of the effect its decisions would have on households facing higher mortgage payments next year, but would take whatever steps were necessary to return inflation to the 2 per cent target.
Ben Broadbent, another BoE deputy governor, last week cast doubt on financial market projections that UK interest rates might need to rise to more than 5 per cent to bring down inflation. That message was echoed at the weekend by Catherine Mann, another MPC member.
