Calls for ‘assertive and hawkish’ BOE response to tax cuts

“The BOE must act to to regain credibility with the market.”

A Deutsche Bank analyst

LONDON: Bank of England (BOE) governor Andrew Bailey is under intensifying pressure to serve as a line of defence for rattled financial markets amid calls to hike interest rates aggressively, perhaps as soon as this week, after the new government’s tax-cutting spree.

Economists at Jpmorgan Chase & Co and Citigroup Inc now expect the central bank to lift rates by 75 basis points (bps) at its Nov 3 meeting. Traders are pricing in a 100-bps salvo and some see another massive increase in December.

“The BOE must act to regain credibility with the market,” said a Deutsche Bank AG analyst.

Although Jpmorgan economist Allan Monks said an emergency move was “unlikely,” he called on Bailey to “deliver an assertive and hawkish speech prior to November to offer some reassurance to visible nervousness in markets.”

Former BOE policy maker Adam Posen tweeted the governor should say “publicly by mid-week” that if sterling is down, rates will go up.

Last Friday’s tax-slashing, borrowing-boosting budget from Prime Minister Liz Truss’ nascent government, which is seeking to jolt economic growth had sent the pound sliding to its lowest since 1985 and bond yields surging at a time when inflation is already its fastest in four decades and around double-digits.

Monks said a “rushed emergency hike” would risk encouraging the public to begin blaming loose fiscal policy for surging prices and perhaps serve as the “ultimate arbiter of whether the government succeeds with its current strategy.”

“We are not sure Bailey would be prepared to do that,” he said in a report to clients. The bank has already come under fire this year from politicians, including Truss, who blame it for allowing inflation to get out of hand, so it may be reluctant to be seen passing judgment on the government’s new stimulus so quickly.”