Treasury officials did not know what was in the government’s “mini” Budget ahead of its announcement and were unable to brief the Bank of England on the overall scale of fiscal loosening it contained, the central bank’s governor said on Tuesday.
The BoE’s monetary policy committee raised interest rates by 0.5 percentage points on the eve of former chancellor Kwasi Kwarteng’s September’s fiscal statement — a smaller step than investors had expected given double-digit inflation.
Although a Treasury official attended the MPC meeting, rate-setters were not able to factor in the impact of a £45bn-package that caused upheaval in financial markets, forcing the central bank into an emergency intervention.
“This was a quite extraordinary time. I have no doubt that Treasury officials told the Bank of England everything they knew . . . It was not at all clear to me what was going to be in this statement,” Andrew Bailey, BoE governor, told the Lords Economic Affairs committee.
The convention ahead of a normal Budget statement would have been for the Treasury’s chief economist to brief the BoE not on individual policy measures, but on the overall scale of changes in the balance between tax and spending.
But Bailey said that because the Office for Budget Responsibility, the fiscal watchdog, was excluded from the process, it would have been difficult to form a view on its overall impact, and that despite the measures trailed by ministers before the statement, the MPC did not know “how big or substantial” it was.
Echoing recent comments by other MPC members, Bailey also said the BoE was likely to continue raising interest rates beyond their current level of 3 per cent in order to bring inflation — which hit a fresh high of 11.1 per cent in October — back to target.
“Our expectation is that there will be more to do,” he said, while pushing back against suggestions by former BoE governor Mervyn King that the BOE should front-load any further interest rate increases in order to reach a peak sooner.
Although there were still big risks to central bank forecasts, he said, the inflationary shock could subside quickly, provided pressures in the UK labour market eased.
Bailey also played down suggestions that the fiscal consolidation set in train by chancellor Jeremy Hunt would make no difference to the outlook for interest rates, because it would only start to bite in later years.
While it was true that the measures were “substantially back loaded”, he argued, the chancellor’s actions had still contributed to the recent fall in market expectations for UK interest rates, which was starting to bring down the costs of fixed-rate mortgages.
Bailey also mounted a defence of the bank’s decision to prolong quantitative easing during the Covid pandemic — criticised earlier this month by the BoE’s chief economist, Huw Pill — saying it was justified at the time on both financial stability and monetary grounds, and that it could not have foreseen the global shocks that had since driven persistently high inflation.
The BoE was on track with its targets for quantitative tightening, Bailey said, having reduced its asset holdings by around £41bn-£42bn this year, through a process of natural run-off as bonds matured, and through the active bond sales it has conducted over the past month.
The Treasury did not immediately respond to a request for comment on the extent to which officials were aware of the mini Budget’s contents when the MPC held its September policy meeting.