Analysts at Deutsche Bank asserted on Friday that Threadneedle Street needed to carry out a “large rate hike” as early as this week to “regain credibility with the market”.
Despite the turbulent atmosphere, the Chancellor confirmed on Sunday that the Government planned to introduce further tax cuts in the new year on top of the £45bn package announced last week, as he refused to comment on the turmoil in markets. However, he repeatedly emphasised that the Government will set out plans that show it is committed to reduce the UK’s debt-to-GDP ratio over the “medium term”.
Gerard Lyons, chief economic strategist at Netwealth and an external adviser to the Prime Minister, said: “The markets have wrongly misread the fiscal stance. What we have is a fiscal environment and policy that will stabilise the economy in the near term.
“Moreover, the feature that would have blown our public finances out of the water would have been a very deep recession, and the policy has effectively ruled out the deep recession that markets feared.”
Yet there are growing concerns that the unfunded tax cuts could lead to the UK’s credit rating being downgraded next month.
Lord Bilimoria, the former president of the Confederation of British Industry, said: “The pound going below parity with the dollar would be an unacceptable situation. So the Bank will have to keep putting interest rates up on the strength of the pound but also to help with inflation.
“The markets have reacted in one way right now. But if they give the strategy a chance for the government to implement these measures.
“Firstly, [the Governor] needs to communicate all of this. We’ve got to continue to be a magnet for investment, and all this will help us. We need to get the message across given this panic reaction we’ve seen in the markets so far.”
It comes as Mr Kwarteng is set to meet senior City executives on Tuesday morning to discuss how ministers can unleash a “Big Bang 2.0” in the Square Mile.
The chancellor and Andrew Griffith, the City minister, will meet with executives from City insurers and asset managers to thrash out details about the deregulatory drive, a Whitehall source said.
However, senior City sources have warned that Mr Kwarteng will need to win the confidence of financial markets if the Government wants to boost foreign investment into the UK.
One source said the new Chancellor would need the “deep confidence of markets” to prevent further devaluation of sterling, which would boost inflation and contribute to higher interest rates.
They added that while sterling’s devaluation would stimulate economic activity, the Government would need the confidence of financial markets to benefit from a possible boost to inward investment.
The Bank of England declined to comment.
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