Bank of England: Monetary policy is between Financial policy and Fiscal policy
2022-09-29
■ Fears that fiscal discipline will be undermined may cause UK bonds and the pound to plummet, raising the likelihood of a Bank of England rate hike
■ If uncertainty about the outlook and financial vulnerability increase, further depreciation of the pound will be inevitable.
On March 23, UK Finance Minister Quartern announced ￡45 billion in tax cuts (until 2026/2027), including the abolition of the top income tax rate, a reduction in the basic tax rate and a freeze on corporate tax rate increases. There are also plans to contribute ￡60 billion over the next six months to subsidize the rising utility costs for households and businesses, and to increase bond issuance to ￡234.1 billion in 2022/2023. Fears of deteriorating public finances intensified as the biggest tax cut since 1972 and the biggest increase in government debt were unsustainable, leading to a plunge in UK bonds (with yields soaring) and spurring a sell-off in the pound. The Governor of the Bank of England (BOE), Mr. Bailey, issued an emergency statement on June 26. 'We will not hesitate to raise interest rates if necessary to meet our 2% price target', but also made clear that 'we will carefully assess the impact of the government's announcement on demand and inflation and the current state of the pound sterling weakness at the next committee meeting'. Mr. Peel, the Bank of England's chief economist, also said the BOE is likely to take "significant policy action" but would prefer to wait until the Monetary Policy Committee (MPC) meeting on Nov. 3.
On March 26, the pound hit a record low of $1.03 against the dollar, the biggest one-day drop since March 2020. According to the International Monetary Fund (IMF), the UK government debt-to-GDP ratio (87.8%) is the smallest of the seven major economies, after Germany (70.9%) and well below Japan (262.5%), Italy (150.6%) and the US (125.6%) (2022 valuation). However, the UK Office for Budget Responsibility (OBR) published a basic forecast in July that this figure would reach 267% in 50 years.The UK Treasury will publish its "medium-term fiscal plan" and the OBR's growth and debt forecasts on November 23, but the IMF has warned that this could undermine the effectiveness of monetary policy. 増Tax increases and spending cuts are pressing issues, and if uncertainty about the outlook and financial vulnerability increase, further depreciation of the pound will be inevitable. Despite dismissing the possibility of any emergency rate hike, markets factored in a 125 basis point hike at the November 3 Monetary Policy Committee; turmoil in the pound is likely to continue for some time to come as speculation rises that the Bank of England is intervening to buy the pound.