The Bank of England’s deputy governor said on Friday that the government’s “mini” Budget would have a “material” impact on the economy and insisted that monetary policymakers must “stay the course” on action to tackle inflation.
In a speech to a securities industry conference, Dave Ramsden said the market turmoil that followed Chancellor Kwasi Kwarteng’s September 23 fiscal event could also have a “significant direct effect” on the Monetary Policy Committee’s forecasts, which are based on assumptions about asset prices.
Ramsden last month voted for a more aggressive move than the 0.5 percentage point interest rate increase favoured by the majority of the MPC. This was to combat the risk “that a more inflationary mentality takes hold throughout the economy”, with the government’s cap on energy prices set to boost household spending, adding to demand pressure, he said.
Ramsden signalled he was likely to take a similarly hawkish view when the MPC next meets in November. “The central question for all nine of us on the MPC is how forceful do we need to be,” he said. “However difficult the consequences for the economy might be, the MPC must stay the course and set monetary policy to return inflation to achieve the 2 per cent target.”
The pound, which plunged in the wake of the “mini” Budget, was now volatile but “essentially unchanged” since the MPC last met, Ramsden said. However, gilt yields are still sharply up over the past fortnight.
A big rise in market expectations of future interest rates was already having an impact on the real economy, through mortgage markets, he said, while noting that it would be difficult for the MPC to assess the longer-term implications without a clearer picture of the outlook for fiscal policy.
“One key consideration for the MPC at its upcoming meetings will be whether the recent repricing of UK assets reflects a changed assessment by markets of the UK macroeconomic policy mix between fiscal and monetary policy,” Ramsden told conference delegates. “The extent to which that can be determined will depend on whether markets settle at a new level, which itself will depend in part on getting a clearer picture on fiscal policy and the fiscal outlook.”
Kwarteng has said he will set out a medium-term fiscal plan explaining how he will fund tax cuts and reduce Britain’s debt on November 23. Government officials have suggested this could be accelerated, with a fiscal statement this month accompanied by new forecasts from the Office for Budget for Responsibility, the fiscal watchdog.
Jonathan Haskel, an external member of the MPC, also suggested this week that the committee would find itself in a difficult position if it does not have more clarity on the outlook for fiscal policy before its next meeting in early November.
“In our forecasts we use OBR data and projections for government spending and taxes, with our next forecasts being in the November monetary policy report, which is several weeks away,” he said at an event on Thursday, adding: “In that regard . . . I welcome the usual close involvement in the Budget process of the OBR. A sidelined OBR generates more uncertainty.”
