Kwarteng tries to calm City’s nerves after the IMF insists on a change of course

K

wasi Kwarteng will step up efforts to reassure the City about its economic plans after the International Monetary Fund criticized the measures and the Bank of England signaled a sharp rise in interest rates could be in store.

The chancellor will meet investment banks on Wednesday after days of turmoil that saw the pound hit and the government’s borrowing costs rise after his mini-budget spooked markets with its package of tax cuts and increased borrowing.

In an emergency statement, the International Monetary Fund (IMF) said it was “closely monitoring” developments in the UK and was in contact with the authorities, urging the chancellor to “reassess the tax measures”.

He warns that current plans, including scrapping income tax from 45p for people on over £150,000, are likely to increase inequality.

The Budget on 23 November will provide an early opportunity for the UK Government to consider ways to provide more targeted support and reassess tax measures, particularly those benefiting high earners

The move came as the Bank of England signaled it was ready to raise interest rates significantly to support the pound and guard against higher inflation.

The chancellor insisted he was “confident” his tax-cutting strategy would deliver the promised economic growth.

Sterling fell to a record low against the dollar on Monday before recovering and the chancellor sought to convince investors in the City that he had a “credible plan” to start reducing the UK’s debt mountain.

But the IMF said in a statement: “We understand that the significant fiscal package announced is intended to help families and businesses deal with the energy shock and boost growth through tax cuts and supply-side measures.

“However, given the increased inflationary pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this stage, as it is important that fiscal policy does not work against the objectives of monetary policy.”

“Furthermore, the nature of the measures in the UK is likely to increase inequality.”

He urged Mr Kwarteng to change course when he returns to parliament in November with a package designed to show how he will get public finances back on track.

“The Budget on 23 November will provide an early opportunity for the UK government to consider ways to provide support that is more targeted and to reassess tax measures, particularly those that benefit high earners,” the IMF said .

Responding to the criticism, a Treasury spokesman said: “We acted quickly to protect households and businesses this winter and next, following the unprecedented spike in energy prices caused by (Vladimir) Putin’s illegal actions in Ukraine.”

The government was “focused on growing the economy to raise living standards for all” and the chancellor’s statement on 23 November “will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product ) in the medium term”.

Shadow chancellor Rachel Reeves said: “The Government must urgently set out how it will fix the problems it has created through its reckless decisions to waste money in a misguided cut to the top tax rate.

“Waiting until November is not an option. The government must urgently review the plans made in last week’s fiscal statement.

Bank of England chief economist Huw Pill warned Threadneedle Street “cannot be indifferent” to the events of recent days, seen as a signal that the cost of borrowing will need to rise to protect the pound and contain inflation.

“It’s hard not to conclude that all of this will require a significant monetary policy response,” Mr Peel said.

Former US Treasury Secretary Larry Summers told Newsnight that Britain was facing a “very ominous” combination of factors.

“Honestly, I can’t remember a time when a set of policy announcements from the G7 elicited such a negative response from both markets and economic pundits,” he said.

“When a country sees its interest rates rise at certain maturities, at times by 4 percentage points in two days at the same time as its currency falls significantly, it is a sign that there has been a major loss of market confidence and trust in the market, and this is of course the kind of situation that requires the attention of the IMF, so it is appropriate for the IMF to monitor. To be honest, I was a bit surprised not to hear from the IMF over the weekend.

“The combination that Britain is facing is very ominous. I think the kind of warning Britain got today from the IMF is the kind of warning that comes much more often to emerging markets with new governments than to a country like Britain.

“The feeling that something like this could happen in a country like Britain can raise suspicions and doubts about what could happen in other countries. I have to say that it’s very early, things can change and economics is not an exact science, but I would certainly say that right now it looks like a series of unprovoked mistakes.”

Rising interest rates can drive up mortgage costs and make business loans more expensive.

With some analysts predicting that the Bank of England’s main rate, currently at 2.25%, will have to rise to 6% next year, some lenders have started to withdraw mortgage products amid the uncertainty.

After two days of big moves, the pound settled lower on Tuesday, trading around $1.08 for most of the day, only briefly deviating with a drop of two cents.

London’s top stock index, the FTSE 100, was also subdued for most of the day.

But European markets fell sharply just before the close as gas prices jumped.

The FTSE closed the day down 0.5% on Tuesday afternoon and, worryingly for the government, gold yields, the price of government borrowing, rose 1.6%, more than a quarter higher than just before a week.

The crisis was sparked by Mr Kwarteng on Friday when he unveiled a whopping £45bn of tax breaks funded by government borrowing.

At Wednesday’s meetings with investment banks, the chancellor is expected to stress the importance of reforms ministers will outline in the coming weeks to boost growth, including his “Big Bang 2.0” measures to further liberalize financial market regulation.

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