Bank of England deputy governor says mini-budget has had “significant” impact on UK economy

The deputy governor of the Bank of England said on Friday that the government’s “mini” budget will have a “material” impact on the economy and insisted monetary policymakers must “stay the course” to fight inflation.

Speaking to a securities industry conference, Dave Ramsden said the market turmoil that followed Chancellor Kwasi Kwarteng’s Sept. 23 financial event could also have “significant direct implications” for the Monetary Policy Committee’s forecasts, which are based on assumptions about asset prices are based.

Ramsden last month voted for a more aggressive move than the 0.5 percentage point rate hike favored by the majority of the MPC. This is intended to combat the risk “that a more inflationary mentality will prevail throughout the economy,” he said.

Ramsden signaled he was likely to take a similarly hawkish stance at the MPC’s next meeting in November. “The central question for all nine of us at the MPC is how energetic we need to be,” he said. “As difficult as the consequences for the economy may be, the MPC needs to stay the course and adjust monetary policy to return inflation to meet the 2 percent target.”

The pound, which tumbled on the “mini” budget, is now volatile but “essentially unchanged” since the MPC’s last meeting, Ramsden said. However, gilt yields have still risen sharply over the past two weeks.

A sharp increase in market expectations for future interest rates is already having implications for the real economy via mortgage markets, he said, while noting that it would be difficult for the MPC to gauge the longer-term implications without a clearer picture of the fiscal policy outlook.

“A key consideration for the MPC at its upcoming meetings will be whether the recent repricing of UK assets reflects a shift in markets’ perception of the UK macroeconomic fiscal and monetary policy mix,” Ramsden told conference attendees. “How far that can be determined depends on whether markets settle to new levels, which in turn will depend in part on getting a clearer picture of fiscal policy and the fiscal outlook.”

Kwarteng said he will draw up a medium-term financial plan, explaining how he will fund tax cuts and reduce Britain’s debt on November 23. Government officials have suggested this could be speeded up, with a financial report this month accompanied by new forecasts from the Bureau of Budget for Responsibility, the financial watchdog.

Jonathan Haskel, an outside member of the MPC, also hinted this week that the committee would be in a difficult position if it did not have more clarity on the outlook for fiscal policy by its next meeting in early November.

“In our forecasts we use OBR data and projections for government spending and taxes, with our next forecasts included in the November monetary policy report, which is a few weeks away,” he said at an event on Thursday, adding: “In that regard . . . I welcome the usual close involvement in the budgetary process of the OBR. A disregarded OBR creates more uncertainty.”