Bank of England warns it will lift rates if pound’s fall continues after Truss’ tax cut gamble

2022-09-26

Liverpool: The Bank of England says it will not hesitate to hike interest rates “by as much as needed” after Prime Minister Liz Truss’ announcement about tax cuts for the rich triggered the fall of the pound and a surge in the cost of the UK government’s debt.

Truss and Finance Minister Kwasi Kwarteng’s astonishing gamble – that cutting tax for top earners will spur economic growth – spooked investors and caused a collapse in the pound to $US1.03 against the greenback, the lowest ever in the sterling’s history since decimalisation.

Shadow culture secretary Lucy Powell, Labour leader Sir Keir Starmer (centre) and former England football player Gary Neville on day two of the Labour Party Conference.Credit:Getty

The cost of government borrowing also surged forcing the Bank of England to release a rare statement on Monday (UK time).

“The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term,” said the bank’s governor Andrew Bailey.

“As the Monetary Policy Committee (MPC) has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly.

“The MPC will not hesitate to change interest rates by as much as needed to return inflation to the two per cent target sustainably in the medium term, in line with its remit,” he said.

At present, the UK’s inflation is 9.9 per cent and the cash rate is 2.25 per cent.

Treasury also released a statement, promising that the Chancellor of the Exchequer Kwarteng would publish independent budgetary forecasts as well as his strategy for reducing debt as a share of GDP (currently 97 per cent) over the medium term at the end of November.

But the pound continued to decline in value immediately after the statements was issued, showing investors remained anxious.

“Friday’s mini-budget has gone down like a lead balloon, much like the pound,” said Craig Erlam from OANDA.

Britain’s Prime Minister Liz Truss in the House of Commons in London, last Friday.Credit:AP

“Serious questions are already being asked about the economic competency of the new government.

“Desperate times call for desperate measures but when the wound is so self-inflicted and terms such as ‘behaving like an emerging market currency’ are being thrown around, I’m not sure we should be hoping the central bank will fix everything,” he said.

The retired international footballer and Manchester United captain Gary Neville, who joined the Labour Party in January, appeared on stage in support of Opposition Leader Keir Starmer at the party’s conference in rival city Liverpool.

“She’s tanked the pound lower than my reputation in Liverpool,” Neville joked.

Starmer said the consequences of the Truss’s economic upheaval would be felt by teachers and nursers through higher mortgage repayments and further inflation.

“It’s real,” he told delegates. “Let them never ever claim again to be the party of sound finances,” he added.

Starmer said by contrast his shadow chancellor Rachel Reeves would have strong fiscal rules around government spending and borrowing.

Reeves told the conference that Truss and Kwarteng had lost all credibility.

“They’re losing confidence, they’re out of control,” she said.

“Last year I told this conference that I was more than happy to take on the Tories when it came to economic competence because I know we can win. I’m now wondering if they even plan to show up for the fight.

“It’s becoming clearer by the day, Labour is the party of economic responsibility and the party of social justice,” she said.

Get a note directly from our foreign correspondents on what’s making headlines around the world. Sign up for the weekly What in the World newsletter here.

Bank of England warns it will lift rates if pound’s fall continues after Truss’ tax cut gamble

Most Viewed in World

From our partners