The UK government’s loosening of fiscal policy “will require a significant monetary response”, the Bank of England’s chief economist said on Tuesday, while signalling the central bank did not expect to act before its next scheduled meeting in November.
Speaking at a conference in London a day after sterling hit an all-time low against the dollar, Huw Pill said the monetary policy committee was “certainly not indifferent” to the sell off in sterling and gilt markets since last week, when chancellor Kwasi Kwarteng set out a “growth plan” centred on big, unfunded tax cuts.
He highlighted the combined effect of the government’s new fiscal stance, “significant” reaction in the markets and the broader context of rising interest rates elsewhere in the world. “All this will require a significant monetary response,” he said.
But Pill pushed back against the calls from some investors for an emergency interest rate rise to shore up the currency and restore confidence in the UK’s macroeconomic outlook.
He said the best way to carry out a “necessarily comprehensive assessment” of not just fiscal policy but also energy and labour market developments would be when the BoE updates its forecasts ahead of its November decision on interest rates.
“In my view, the combination of fiscal announcements we’ve seen will act as a stimulus to demand,” Pill said, while underlining this did not necessarily represent the view of the other eight MPC members.
While the government is focused on generating growth, the BoE is concerned about persistent inflation and is prepared to raise interest rates to restrain demand and slow down price rises.
The pound was up 0.6 per cent in afternoon trading in London at $1.075, trimming larger gains earlier in the session. Sterling has fallen about 20 per cent against the US currency this year and remains close to its lowest levels since 1985.
Although traders have pulled back from bets that the BoE would announce an unexpected rate rise, markets were pricing in a 1.5 percentage point increase from the UK central bank, to 3.75 per cent, in November.
UK high-street banks have begun pulling mortgage loans in response to rising yields, with mortgage rates expected to rise substantially.
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