Bank of England's tax cuts work to 'delay and complicate' inflation handling: BERI CEO

BERI (Business Environment Risk Intelligence) CEO Saruhan Hatipoglu joins Yahoo Finance Live to discuss the Bank of England's intervention in the bond markets and the new prime minister's economic plan for the UK.

Video transcript

- Saruhan, good to see you. Obviously, a very tough day as markets in the UK are really trying to digest what they can expect from the UK economy. What are your big takeaways right now?

SARUHAN HATIPOGLU: Well, unfortunately, there are two big takeaways here. One is that you're seeing the markets respond very positively to that. And I see some investors being very happy about it. So in a way, it kind of stopped the bleeding that we've been seeing in this market as well as in Europe.

But at the same time, this is all a big facade because what is happening here is that the government of UK has made a very risky decision here engaging in expansionary fiscal policy at a time when the country is suffering from inflation. And then the Bank of England, whose job was, and who has been doing this, to contain inflation actually going along with it because they really didn't have a choice to do so even though they didn't want to.

- You say it stopped the bleeding. To further that analogy, is this merely a Band-Aid?

SARUHAN HATIPOGLU: It is a Band-Aid. But it's a Band-Aid on a gaping wound, Dave. That that's the problem that I'm seeing here because if you're looking at it-- again, when inflation is a problem and the central bank of your country is trying to contain inflationary pressure, yet the government is coming in and is trying to stimulate consumer demand, I see here a big, big miscommunication that sends a message to investors, not only UK investors, but investors worldwide, that the confidence level of investors is actually going to be badly affected by it.

So yeah. We're seeing great market reaction to it. And part of it is because we've seen this movie before, a central bank reversing course. Of course, the economy is not doing well. They're going to do that. But at the same time, we've heard from Federal Reserve clearly that they are not going to change direction. So I think what we're seeing in the US market at least is just investors thinking, could this happen in the United States? And the answer is no.

- Saruhan, what does this mean for UK monetary policy, the potential consequences of this, and implications for the next rate hike?

SARUHAN HATIPOGLU: Well, so that is a very good question. And I believe in the statement that people will predominantly believe a simple lie than a complicated truth, Seana. And the complicated truth is that the decision of the government to do expansion of fiscal policy through tax cuts is only going to delay and complicate how inflation is going to be controlled in the UK. So maybe the interest rates could be actually capped at 4%, 4% and 1/2%. Now I think the probability of interest rates that are going up to 6% has increased. What does that mean for that economy?

Well, just look at the mortgage markets there. UK mortgage lenders, some of them stop lending a couple of days ago, seeing all the risks there. And their mortgage market is a little different than ours. They don't have this 30-year fixed mortgage rates. Once they did for a couple of years and then the rates rose. So there is a lot of risk. I think the risk was taken to kind of-- the political promises to that the government has made. But to me, the worst thing here is this disharmony between Bank of England and the government of England.

- And, obviously, this was just a mini budget that we saw this reaction to. The full budget is supposed to be coming out in the UK in November. What are your expectations between now and then as the BoE is still trying to tamp down on inflation while sort of being dragged in to this economic fight as well?

SARUHAN HATIPOGLU: Yeah. I think that's some good news that November 23, actually, they have some time to think about this. And, yes, I do understand the need to stimulate the economy. We're all experiencing, in the developed world especially, a recessionary period. That's certainly true. And the government of UK is trying to get the 2.5% growth rate. That's understandable too.

However, untargeted expansionary fiscal policy is not the way to go. We've seen it many times in emerging markets, by the way, Rochelle. And IMF actually had a scathing response to what the UK is doing. If you just cover the title and read the note, you would think that you're talking about an emerging market. So what is happening here is this untargeted fiscal reaction.

And hopefully in a month or so, a month and a half, when they sit down and think about what it is that they need to do for economic growth while containing inflation, would be going back to structural reforms, going back to reform in general to get the economy going, not stimulating consumer demand at a time when inflation is an issue.

- What are the expectations that the new Prime Minister Liz Truss will do next? And is there anything the UK can do to stave off what appears to be a deep recession ahead?

SARUHAN HATIPOGLU: At this point, the probability of that big recession, Dave, has increased dramatically. Can they do something? Yes. They can go back. They can reverse this policy. And they can focus on the long-term issues that I mentioned while with the government playing ball with the Bank of England because Bank of England made a very interesting statement today.

And when I read that, I said, OK, they're actually targeting the government here. They said the decision by the government to do this tax policy, the tax announcement, has caused the UK stock market to decline significantly and created a material risk to the financial industry. That, to me, shows that you're really pointing fingers at the government. There is no coordination here. There is no collaboration here. And if they cannot find a common ground and work together, the recession is going to be pretty bad and long term.

- Prime Minister Liz Truss really take an economic gamble here. BoE is stepping in as a result. What does this mean for Liz Truss?

SARUHAN HATIPOGLU: She took a big risk. But the most terrifying words in the English language I think Ronald Reagan said is, I'm from the government, I'm here to help. And that's what they did by trying to stimulate consumer demand here. And again, I'm hoping that at some point the conservative lawmakers in the UK will sit down with the government and discuss about the long-term implications of this policy because, again, we're seeing some good news, very short-term good news here.

Investors are thinking Bank of England is going to play ball with the government. That is not going to be the case. So the sooner the government of UK understand that this policy has a very risky side to it, the better it is for what we're going to be seeing in the long-term future.

- And obviously, Saruhan, these are compounded problems. When you take it back to Brexit and then you add COVID and then, of course, you now add some of these changes that they're trying to make, really trying to get the economy to grow, what will they need to do to actually get the UK economy churning again?

SARUHAN HATIPOGLU: Well, it's not going to be in the short term. And I think all developed countries are realizing this now. We have been using free money even going before COVID with interest rates being low for such a long time period. Now things have changed. And I think it's important for the government to understand and accept that things have changed. The central banks around the world have. They have been increasing interest rates.

What we're seeing is a short term change of policy by Bank of England to make sure that the market did not collapse there. So the government, as I said before, they need to sit down and think of a long-term strategy. What is it that we can do to increase job growth in this country? What is it that we can do to eliminate structural impediments in the economy so we can actually generate growth? Things pretty much the UK argued when they exited the European Union.

They said, hey, we can't do these being in the EU. Now they're not in the EU. Now is the time to sit down and look into these structural issues. There will be short-term pain. But it is needed to get rid of the excesses that have built in the economy. And, hopefully, the government will understand that sooner than later.

- A long and difficult road ahead there in the UK. Saruhan Hatipoglu, nice to see you. Thanks so much for your insights.