A senior Bank of England official has warned “significant” increases in interest rates will have to be imposed by the central bank in response to tax cuts put forward by Kwasi Kwarteng in his mini-budget. The Bank’s chief economist, Huw Pill, said the chancellor’s planned tax cuts would act as a stimulus and increase inflationary pressures, with the result that interest rates would need to go higher than previously forecast. “In my view, a combination of the fiscal announcements we have seen will act a stimulus to demand in the economy,” he said. “It is hard not to draw the conclusion that this will require a significant monetary policy response.” Pill’s remarks are likely to further spook homebuyers and mortgage borrowers near the end of a fixed-rate mortgage about the cost of financing their loans. Lenders have already pulled hundreds of mortgage deals this week, following Kwarteng’s mini-budget and the pummelling the pound has taken on foreign exchanges, as they struggle to price their products due to the financial market volatility.
Some economists have said that if interest rates rise to levels now expected by financial traders, who are forecasting the Bank’s base rate rising to nearly 6% by spring 2023, the UK property market will nosedive and hundreds of thousands of homeowners could find themselves struggling with monthly mortgage payments. Pill said the central bank had no mandate to maintain the pound at a particular level or regulate the value of British assets, which have slumped in value as sterling has tumbled in recent weeks. However, he said a decline in the value of property and other financial assets had an influence on consumer and business spending and the broader health of the economy. “As a small, open, market economy, changes in asset prices have an important influence over macro economic developments through the cost of financing, through the cost of imports, and the effect on aggregate supply and demand,” he said. Pill played down the chances of a rise in the base rate from the current level of 2.25% before the Bank’s next scheduled rate setting meeting in November, saying it needed to take a more “considered approach” recognising the limitations of monetary policy in “fine tuning shorter term developments”. Most countries have seen their exchange rate with the US dollar decline following a series of interest rate rises by the Federal Reserve that has made the US a more attractive place to deposit funds. Pill said this accounted for some of the decline in the pound, but the mini-budget had made the situation worse for the UK.