In his
first fiscal statement since becoming Chancellor, Kwasi Kwarteng hailed a “new
approach for a new era” as he unveiled a series of tax cuts and other
measures designed to spur economic growth.
During a ‘mini-budget’ delivered on 23
September, the Chancellor outlined a Growth Plan centred on the biggest package
of tax cuts in fifty years. As well as reversing April’s National Insurance
rise and the planned increase in Corporation Tax, Mr Kwarteng also announced Income
Tax and Stamp Duty cuts with the total cost of the package estimated to be
almost £45bn by 2027. On 3 October, the Chancellor announced a U-turn on plans to scrap the 45p rate of Income Tax.
These plans are set to be funded via a large
increase in borrowing, with Treasury estimates suggesting an additional £72bn
of government borrowing as a result of the Chancellor’s announcement. Paul
Johnson, Director of the independent Institute for Fiscal Studies, described
the plans as a “big gamble” and sterling came under intense pressure
after the statement as financial markets gave their verdict on Mr Kwarteng’s
Growth Plan.
In an unusual intervention, the International
Monetary Fund (IMF) also openly criticised the Chancellor’s proposals, warning
that ‘large and untargeted fiscal packages’ were not recommended at a
time of ‘elevated inflation pressures.’ The IMF, which works to
stabilise the global economy, said it was ‘closely monitoring’
developments in the UK and urged the government to ‘re-evaluate’ its
policies in the coming weeks.
Despite the criticism and market turmoil, the government had insisted the tax cuts outlined in the Growth Plan are the ‘right plan.’ The Treasury has also now announced a date when the Chancellor will set out details of his Medium-Term Fiscal Plan. Mr Kwarteng will deliver his next fiscal statement on 23 November and this time it will be accompanied by growth and borrowing forecasts produced by the Office for Budget Responsibility (OBR).
Bank under rate hike
pressure
Despite increasing its benchmark interest rate for the seventh meeting
in a row, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) remains
under intense pressure to further raise rates.
At its latest meeting, the MPC voted by a 5-4
majority to hike the Bank Rate by 0.5 percentage points to 2.25%. Among the
dissenting voices, three were in favour of raising rates by a larger amount of
0.75 percentage points, while the other would have preferred a smaller
quarter-point rise.
When announcing its decision on 22 September,
the MPC
once again expressed a readiness to implement further rate rises
as required. Specifically, the minutes to the meeting
stated that, ‘Should the outlook suggest more persistent inflationary
pressures, including from stronger demand, the Committee will respond
forcefully, as necessary.’
The
MPC’s next policy announcement is scheduled for 3 November, but some analysts have warned the Bank may need to act sooner following
the sharp decline in the value of sterling in the aftermath of the Growth Plan.
On 26 September, the BoE responded to this speculation by saying it ‘will
not hesitate’ to raise interest rates if needed and that it was monitoring
markets ‘very closely.’
Speaking at the International Monetary Policy
Forum the following day, the Bank’s Chief Economist Huw Pill reiterated this
position. Mr Pill said he had concluded that “the combination of fiscal
announcements that we’ve seen will act as a stimulus” before adding that
this will require “a significant monetary policy response.”
The Bank is clearly under intense pressure to
act decisively, either before or following the MPC’s next scheduled meeting.
Money markets have already fully priced in a one percentage point increase in
the Bank Rate to 3.25% at the November meeting and analysts have suggested
rates could potentially hit 5.5% or even higher by next spring.
Markets
(Data compiled by TOMD)
September was a challenging month
for global stock markets, which largely closed the month in negative territory
as global recessionary fears intensified.
In the
UK, the Prime Minister and Chancellor met with the OBR on 30 September, in a move widely seen
as an attempt to reassure financial markets following a challenging week, which
saw an abrupt policy
shift by the BoE to restart bond purchases.
Positive data released
by the Office for National Statistics (ONS) on the last day of the month showed
UK economic output increased by 0.2% in Q2, revised up from a previous reading
of -0.1%. European markets responded positively on
the last day of Q3. The FTSE 100 edged up by 12.22 points on the final day of trading
to 6,893.81, the blue-chip index closed the month down over 5%. The
midcap-focused FTSE 250 and the AIM registered losses of 9.94% and 8.65% respectively in
September. The Euro Stoxx 50 closed the month down 5.66%.
US stocks recorded another week of losses in a downbeat end
to the month and quarter. The Dow closed the month down 8.84% on 28,725.51. The tech-heavy Nasdaq closed September on 10,575.62,
down 10.50%. In Japan, the Nikkei 225 closed
September on 25,937.21, down 7.67%.
On 30 September, sterling managed a
rebound, edging back up to the levels seen before the Chancellor unveiled his
Growth Plan.
On the foreign exchanges, the euro closed at €1.13 against
sterling. The US dollar closed the month at $1.11 against sterling and at $0.97
against the euro.
Brent Crude closed the month trading at around $85 a barrel, a drop of 10.16%, as recessionary concerns weigh, and the impact on demand is considered. Gold is currently trading at around $1,670 a troy ounce, a loss of 2.57% on the month.
UK inflation dips
slightly
While the latest official figures did report a small decline in
consumer price growth and the government’s energy price cap is set to reduce
the anticipated peak, economists still believe inflation could be relatively
slow to fall back from current elevated levels.
Data
released last month by ONS revealed that UK
consumer price inflation eased for the first time in almost a year. A decline
in petrol and diesel prices saw the headline rate dip to 9.9% in August, down
from 10.1% in the previous month.
The government’s decision to introduce its
Energy Price Guarantee has also limited the impact of October’s rise in
household energy bills. The decision means typical bills will now rise by
around 25% rather than 80% and, as a result, will thereby reduce the
anticipated peak in the rate of inflation.
According to updated forecasts released by the
BoE, inflation is now expected to reach a high of just under 11% in October,
significantly below the 13% figure predicted prior to the energy price cap
announcement. However, the Bank also said it then expects inflation to remain
above 10% ‘over the following few months’ before it starts to fall back.
Signs
that jobs boom is fading
Although the latest
set of employment statistics did reveal that unemployment fell to its lowest
level since 1974, experts have warned that the UK labour market might be
starting to turn.
Figures
released last month by ONS showed that the unemployment rate across the
May–July period dropped to 3.6%, a 0.2 percentage point decrease compared to
February–April’s figure. The data, however, also showed that the decline was
mostly due to a fall in the size of the workforce, with the number of people no
longer looking for work hitting a five-year high.
The
latest update also revealed a fall in both the employment rate and job
vacancies. The employment rate in the three months to July slipped to 75.4%,
0.2 percentage points lower than in the previous three-month period, while the
total number of job vacancies, although still historically high, fell by 34,000
during the June–August period, the largest decline in two years.
Survey
evidence released last month by the Recruitment and Employment Confederation
(REC) also highlighted a slowdown in hiring, reflecting greater economic
uncertainty, rising costs and candidate shortages. Commenting on the findings,
REC Chief Executive Neil Carberry suggested “the post-pandemic jobs rush is
now abating.”
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