The UK government’s loosening of fiscal policy “will require a significant monetary response”, the Bank of England’s chief economist Huw Pill said, pushing expectations for interest rates sharply higher while chancellor Kwasi Kwarteng sought to reassure top bankers amid market turmoil.
Traders are now betting on a wave of interest rate hikes in coming months following Mr Pill’s comments. Futures markets imply interest rates in the UK are forecast to nearly treble to 6.25 per cent by May, from 2.25 per cent at present.
Speaking a day after sterling hit an all-time low against the dollar, Mr Pill said the Monetary Policy Committee was “certainly not indifferent” to the sell-off in the pound and the market for UK bonds, known as gilts. The declines were sparked by Mr Kwarteng’s announcement last week of big, unfunded tax cuts.
As the gilt sell-off intensified, the yield on 10-year debt rose by 0.26 percentage points to 4.5 per cent, the highest level since 2008. Thirty-year borrowing costs rose to 5 per cent, the highest since 2002, ahead of a sale of new 30-year debt later this week.
Mr Pill highlighted the combined effect of the government’s new fiscal stance, “significant” reaction in the markets and the broader context of rising interest rates in other countries. “All this will require a significant monetary response,” he said.
However, he signalled the central bank did not plan to act before its next scheduled meeting in November, pushing back against calls from some investors for an emergency interest rate rise to shore up the currency and restore confidence in the UK economy.
Mr Pill’s comments came as Mr Kwarteng told a group of leading insurers and asset managers on Tuesday that he was “confident” in the plan set out last week in his so-called mini-budget, and later spoke to Conservative MPs to calm fears that the government had lost control of the economic situation.
Mr Kwarteng last week unveiled big tax cuts without the usual external assessment from the independent Office for Budget Responsibility (OBR) and without setting out fiscal rules he plans to adopt. In an implicit criticism of this lack of process, Mr Pill said that it was “helpful” that the Treasury had now confirmed that it would publish new fiscal rules in November alongside a full OBR forecast.
Meanwhile HSBC and Santander, two of the UK’s largest mortgage providers, suspended new deals on Tuesday, while Nationwide increased rates, as homebuyers chased a dwindling supply of home loans. Together with Lloyds Banking Group, which suspended some products on Monday, the lenders account for about half of the UK mortgage market. A host of smaller providers have also stopped offering products in response to Mr Kwarteng’s mini-budget.
Banks still offering new mortgages on Tuesday morning — including HSBC, Barclays and NatWest — were being deluged with demand, according to brokers.
Aaron Strutt, a broker at Trinity Financial, said: “For the moment ... there are options for borrowers, but we need the other lenders to come back into the market otherwise they will receive too many applications and pull out.”
HSBC told brokers later on Tuesday that it had “removed from sale” its new residential and buy-to-let products “with immediate effect”. The bank said it would return to market tomorrow.
Mr Strutt added: “There’s going to be a race to secure these mortgages tomorrow.”
Banks use swap rates to mitigate interest rate risk on fixed deals, by swapping payments on the mortgage loan to a counterparty in exchange for floating-rate payments.
Andy Golding, chief executive of OneSavings Bank, said: “It’s difficult to price fixed-rate mortgages now because the swap curve is so volatile.” — Copyright The Financial Times Limited 2022