The Bank of England’s chief economist has contradicted ministers by insisting that Kwasi Kwarteng's debt-fuelled tax cuts were partly to blame for the market chaos gripping Britain.
Huw Pill, one of the Bank’s rate-setters, said there was “undoubtedly a UK-specific component” to the record-breaking plunge in the pound and gilts as he repeated pledges for a “significant” increase in interest rate in response to the crisis.
Ministers have played down suggestions that the turmoil was caused by the Chancellor’s £45bn plan for tax cuts. The Bank of England was forced to step in to buy gilts on Wednesday as debt markets ructions stoked fears of a “Lehman moment” for pension funds.
Speaking at the Institute of Directors Northern Ireland annual dinner, Mr Pill said: “There has been a significant repricing of financial assets. Part of that repricing reflects broader global developments.
“Part of it reflects the ongoing normalisation of macroeconomic policy after the pandemic-induced episode of exceptional ease. But there is undoubtedly a UK-specific component.”
Mr Pill also said a regulatory clampdown on “some of the shadow-ier parts of the non-bank financial sector” would be needed after the problems exposed by this week’s market turmoil.
He repeated that the Chancellor’s plan to borrow to fund tax cuts would require a significant tightening in monetary policy to curb inflation. Markets currently expect interest rates to exceed 6pc.
It came as the chairman of Parliament’s Treasury Committee urged the Chancellor to bring forward his fiscal plan to help boost market confidence.
Mel Stride, Tory MP and head of the backbencher group, revealed that Mr Kwarteng will get a first look at the Office for Budget Responsibility’s projections on October 7 before full forecasts at the end of October in the run-up to the fiscal plan.
After a market backlash to his tax cuts, Mr Kwarteng promised a medium-term plan to shore up the public finances on November 23.
However, Mr Stride urged the Chancellor to bring forward his statement and the OBR forecasts to at least the end of October. He said it is “not acceptable” to unveil the forecasts after the Bank of England’s rate-setting committee meets on November 3 to decide the size of the next interest rate rise.