‘Feverish’ markets want clarity on UK fiscal policy, says Bank of England spokesman

Markets remain “feverish” and next Monday’s medium-term budget plan will be critical to investors’ clarity on UK fiscal policy and the broader economic context, a senior Bank of England official warned on Monday.

Pigs rose sharply on Monday after Rishi Sunak was confirmed as next prime minister of the UK. Economists believe he is likely to broadly support the fiscal tightening planned by Chancellor Jeremy Hunt, easing pressure on the central bank to aggressively raise interest rates to curb inflation.

But Dave Ramsden, deputy governor for markets and banking at the Bank of England, told a House of Commons Treasury select committee that government borrowing costs are still higher than they were before the September “mini-budget.”

He added that “things are still unsettled” due to political developments, as well as uncertainty about the monetary and fiscal outlook.

“Confidence is being restored, at least against this benchmark, but it needs to be seen through,” he said, adding that a return to “stability around policy making and shaping fiscal events will be really important.”

If Sunak confirms the current Halloween statement plan with accompanying predictions from Office of Budgetary Responsibilityindependent financial observer, the Bank of England will have three days to assess the implications before making its next interest rate decision.

In September Monetary Policy Committee convened to set policy just a day before then-Chancellor Kwasi Kwarteng’s “mini-budget” upset markets as politicians failed to take into account the impact of his package of unfunded tax cuts on inflation.

Ramsden, who has spent much of his career as a Treasury civil servant, said the sequence was unusual, while the presentation of the event – with no accompanying economic or financial outlook – was “unprecedented.”

“Getting clarity on the fiscal arithmetic and the broader economic context as OBR sees it will be very important. If this is available by next Monday, it will be really important,” he said, stressing that the government should determine the content and timing of the financial report.

Ramsden said Bank of England officials had already contacted Treasury officials about factors that could affect OBR’s forecasts. He said a key element would be the form the government’s energy price guarantee took after Hunt’s announcement that it would be more targeted from April next year.

Although he has consistently been one of the more hawkish members of the MPC, voting against the majority for a 0.75 percentage point hike in September, Ramsden gave no new guidance on the extent of the tightening, which he would approve next week.

Instead, he said, MPC is “clearly aware” of the implications of its decisions for households facing higher mortgage payments next year, but will take all necessary steps to bring inflation back to its 2 percent target.

Ben Broadbent, another deputy governor of the Bank of England, questioned financial market forecasts last week that UK interest rates might need to be raised to more than 5 percent to bring down inflation. This message was echoed over the weekend by Katherine Mann, another member of the MPC.