The International Monetary Fund has warned the UK that it should re-evaluate its planned tax cuts, saying they are likely to cause further inflation.
In a statement last night (September 27), the IMF said it is important that fiscal policy, through which the UK government is trying to encourage growth by way of tax cuts, does not work at “cross purposes” to monetary policy.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said in a statement.
It also warned that the package of measures would heighten inequality in the UK.
[The mini-budget will require] a significant monetary responseHuw Pill, Bank of EnglandOn Monday, the governor of the Bank of England, Andrew Bailey, said the central bank is monitoring developments in financial markets “very closely” in light of “significant repricing” of financial assets.
The bank raised interest rates by 0.5 percentage points earlier this month, and the rate-setting monetary policy committee is not due to make a decision on the next rate until November 3.
The bank’s chief economist, Huw Pill, said yesterday the government’s new plan will require a “significant monetary response”, raising expectations of an income rate hike.
This is despite chancellor Kwasi Kwarteng announcing a new medium-term fiscal plan, which promises debt will fall within the next five years.
Senior investment and markets analyst at Hargreaves Lansdown, Susannah Streeter, said the IMF's move has added worries that the UK is taking on the characteristics of an emerging market economy, and risks ditching its developed country status.
"It’s now not only wracked with trade disruptions, an energy crisis and soaring inflation but it’s also being closely monitored by international body known as the world’s lender of last resort."
Mini-budget
Last Friday, the chancellor announced £45bn in tax cuts, including abolishing the 45p higher income tax rate as well as scrapping the health and social care levy.
These measures, along with the energy support package offered to households and businesses this winter, will mostly be funded by borrowing.
The announcement has led to a significant fall in the value of the pound, which slumped to historic lows earlier this week.
The gilt market is also crashing, with the yield on the 10-year government bond surging above 4.5 per cent today.
sally.hickey@ft.com
