Mini-budget will likely mean higher interest rates, warns Bank of England governor
UK borrowers can expect to face higher interest rates as a result of the Truss government’s tax and spending decisions during its six weeks in power, the governor of the Bank of England has warned.
Despite the U-turn on corporation tax on Friday that saw the sacking of Kwasi Kwarteng as chancellor, Andrew Bailey said the extra stimulus provided in last month’s mini-budget would add to inflation and force the Bank into tougher-than-expected action.
Bailey said he had impressed on the new chancellor, Jeremy Hunt, the need for the public finances to be sustainable and that there had been a “clear and immediate meeting of minds”. Hunt used his first interview to stress mistakes made by Truss would require “difficult decisions” to be made.
The governor said it was not for him to “constrain the choices” Hunt will make in his fiscal statement on 31 October, and said the decision to go ahead with the planned increase in corporation tax was “important”.
Even so, Bailey made clear that tough action from the Bank on borrowing costs could be expected in early November.
He said Russia’s invasion of Ukraine had resulted in the UK being hit by a bigger shock than during the oil crises of the 1970s, and the government’s decision to protect households and businesses with a price cap was “understandable”.
But the governor added: “The price cap will add to demand relative to what it would have been without the cap, and thus what we thought in August. It will therefore add to inflationary pressures towards the later part of the two-year period on which we focus.
“More recently, the UK government has made a number of fiscal announcements, and has set 31 October as the date for a further fiscal statement. The monetary policy committee (MPC) will
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