LONDON —
The government of new British Prime Minister
Liz Truss on Monday came under
pressure after the pound hit a record low against the dollar following a huge
tax-cutting budget last week.
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In a rare statement
issued between its rate-setting meetings, the Bank of England (BoE) said it was
monitoring market developments “very closely”.
The UK central bank
said it would “not hesitate to change interest rates by as much as needed” to
curb high inflation — hinting at further pain for British households and
companies.
But it also
signaled that it would wait until its next policy meeting on November 3 before
fully assessing the impact of the government’s contentious plans.
The main opposition
Labor party lambasted Truss for the plans, which rely on a borrowing splurge
and which some economists warn could further fuel inflation.
Addressing the party’s
annual conference, Labour finance spokeswoman Rachel Reeves described the
situation as a “national emergency”, noting the pound’s slump would send import
and borrowing costs sharply higher.
She likened Truss
and Chancellor of the Exchequer
Kwasi Kwarteng to “two desperate gamblers in a
casino chasing a losing run”.
But Downing Street
insisted the aggressive plan of tax cuts announced by Kwarteng on Friday — just
three weeks into Truss’s first month in office — was essential to kick-start
anemic growth.
The plan will “grow
our economy faster than our debts”, Truss’s spokesman said, adding that the
government would not comment on market movements destabilizing the pound.
In a bid to
reassure the markets, the Treasury announced Kwarteng would outline a new
“medium-term fiscal plan” on November 23, “including ensuring that debt falls
as a share of GDP in the medium term”.
Kwarteng also
intends more supply-side reforms to cut red tape in the UK economy, and the
fiscal plan will be accompanied by new independent forecasts from the Office
for Budget Responsibility, the Treasury said.
The absence of such
forecasts from last Friday’s “fiscal event” has contributed to the sense of
alarm on financial markets.
Dollar parity looms
Britain has been facing a cost-of-living crisis with soaring energy prices
coupled with inflation and wage stagnation.
On Friday, Kwarteng
brought forward a plan to cut the lowest rate of income tax, and reduce the
highest to 40 percent from 45 percent.
But investors were
spooked by the huge amount of borrowing likely needed for the package, which
critics said would benefit the rich far more than the poorest hit by the
cost-of-living crisis.
The cost of
measures to cap energy prices alone have been calculated at £60 billion for
only six months.
But economists
estimate the whole tax package at between £100–200 billion.
The pound on Monday
struck an all-time low at $1.0350 before regaining some ground to stand at
$1.0706 around 1550 GMT, still perilously close to parity.
Political fallout
Without central bank intervention this week, the pound could well fall
below dollar parity soon, warned Lee Hardman, an analyst at MUFG, Japan’s
largest bank.
The
Bank of England Thursday raised its benchmark borrowing rate by 0.50 percentage points to 2.25
percent. Markets now believe that the rate could rise two percentage points by
November.
Tension between the
bank and the Treasury is now “palpable”, added Susannah Streeter, analyst at
Hargreaves Lansdown.
Tony Travers,
director of the LSE London research group, said Truss and Kwarteng had taken a
“major gamble that the radical policies adopted can quickly deliver growth”.
“Many Conservative
MPs will be concerned that their party’s poll ratings will be damaged,
particularly by the profile of the tax cuts proposed,” he said, ahead of the
Tories’ own annual conference next week.
“I would expect
pressure from MPs on the prime minister and chancellor to grow sharply in the
coming week.”
While the UK’s inflation rate stands at 9.9 percent — the
highest in the G7 — the central bank also estimates that the country entered
recession during the third quarter.
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