Interest rates

A mini-budget will likely mean higher interest rates, Bank of England Governor warns | Interest rate

British borrowers can expect to face higher interest rates due to tax and spending decisions by the Truss government during its six weeks in office, the Governor of the Bank of England has warned.

Despite Friday’s corporate tax U-turn which saw the sacking of Kwasi Kwarteng as chancellor, Andrew Bailey said the additional stimulus provided in last month’s mini-budget would increase inflation and force the Bank to take tougher measures than expected.

Bailey said he had made clear to new Chancellor Jeremy Hunt the need for public finances to be sustainable and there had been a ‘clear and immediate meeting of minds’. Hunt used his first interview to point out that the mistakes made by Truss would require “tough decisions” to be made.

The governor said it’s not up to him to “constrain the choices” Hunt will make in his Oct. 31 budget statement, and said the decision to go ahead with the planned tax hike on corporations was “significant”.

Even so, Bailey made it clear that tough measures from the Bank on borrowing costs could be expected in early November.

He said Russia’s invasion of Ukraine had come as a bigger shock to the UK than during the oil crises of the 1970s, and the government’s decision to protect households and businesses with a cap prices was “understandable”.

But the governor added: “The price cap will increase demand compared to what it would have been without the cap, and therefore to what we thought in August. This will therefore add to inflationary pressures towards the end of the two-year period on which we focus.

“More recently, the UK government has made a number of budget announcements and has set October 31 as the date for a new budget statement. The Monetary Policy Committee (MPC) will react to all this news at its next meeting in just under three weeks. This is the right sequence in my opinion. We will then know the full scope of fiscal policy. But I will repeat what we have already said. We will not hesitate to raise interest rates to achieve the inflation target.

The Bank raised interest rates by half a percentage point to 2.25% last month, and Bailey’s comments will heighten speculation of a 0.75 or 1.00 percentage point hike in November .

Bailey criticized the Truss government’s decision not to have the September mini-budget reviewed by the Independent Office for Budget Accountability and said he was pleased that the October 31 statement was accompanied by a report from the watchdog . “Flying blind is not the way to have fiscal sustainability,” he said.

Mortgage rates rose sharply due to the unfavorable market reaction to the government’s mini-budget, leading to a sharp drop in home buying activity.

Bailey hinted that the Bank of England would be reluctant to intervene if further turbulence arises when financial markets reopen on Monday.

Threadneedle Street acted to stop a run on pension funds after the mini budget, but Bailey said ‘the interventions are strictly temporary and have been designed to do the minimum necessary’.

He added: “Our financial stability operation was largely a short-term operation. It ended yesterday after only two weeks of operation.

The Bank’s actions were aimed at ensuring financial stability rather than steering market interest rates to a particular level, he said.