IMF and Moody’s slam UK fiscal policy after sterling collapse

The International Monetary Fund (IMF) and rating agency Moody’s have slammed Britain’s new economic strategy as investors braced for more devastation in bond markets, which has already forced the Bank of England to promise “significant” action.

Overnight comments from the IMF and Moody’s increased pressure on incoming Treasury Secretary Kwasi Kwarteng to reconsider his policies, prompting a plunge in the value of UK assets in recent days.

Britain’s new Prime Minister, Liz Truss, of the Conservative Party, took office on September 6 and said she wants to pull the economy out of years of stagnant growth with deep tax cuts and deregulation.

Kwarteng laid out a plan on Friday to cut taxes through huge increases in borrowing, which he believes will be repaid by a doubling of Britain’s economic growth.

At the same time, over the next six months alone, the government is subsidizing energy bills for homes and businesses at a cost of £60bn (€67bn).

The IMF said the proposals, which sent the pound to an all-time low of $1.0327 on Monday, are likely to widen inequality and called their wisdom into question.

“Given the heightened inflationary pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this time, as it is important that fiscal policy does not conflict with monetary policy,” said an IMF spokesman.

Jim Reid, research strategist at Deutsche Bank, called the “rebuke” “pretty scathing.”

The IMF has a symbolic importance in British politics: its 1976 bailout of Great Britain after a balance of payments crisis has long been considered a low point in the country’s modern economic history.

In a blunt press release, Moody’s said large unfunded tax cuts were “credit negative” for the UK.

“A prolonged confidence shock resulting from market concerns about the credibility of the government’s budgetary strategy and leading to structurally higher funding costs could weaken UK debt affordability more permanently,” Moody’s said.

BUDGET

The IMF said a budget due by Kwarteng on November 23 would provide an “early opportunity for the UK government to explore ways to provide more targeted support and to reassess tax measures, particularly those benefiting high earners”.

Kwarteng said the government is committed to fiscal responsibility in the medium term and its full budget in November will include debt haircut plans.

On Tuesday, Bank of England chief economist Huw Pill said the central bank was likely to come up with a “significant” rate hike at its next meeting in November, adding that the financial market turmoil is having a big impact on the economy and in the Next would flow forecasts.

UK government bonds have sold off at a frenzied pace in recent days, with 10-year borrowing costs on track to post their biggest calendar month rise since at least 1957, according to a Reuters calculation.

The pound fell 0.4 percent to trade at $1.0690 by 0628 GMT.

“It’s hard not to conclude that this will require a significant policy response,” Pill told the CEPR Barclays Monetary Policy Forum.

With analysts still speculating on Britain’s future financial direction and markets volatile, a growing number of mortgage lenders unable to price loans halted sales.

https://www.independent.ie/business/world/imf-and-moodys-censure-uk-budget-policy-after-sterling-dip-42023155.html IMF and Moody’s slam UK fiscal policy after sterling collapse

Fry Electronics Team

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