Mini-Budget trashed UK reputation, says BoE’s Bailey

The governor of the Bank of England told MPs that the UK is struggling to rebuild its reputation after the disastrous mini-budget.

Andrew Bailey said Britain’s position has “taken a blow” after Kwasi Kwarteng’s unfunded tax cuts in September sent financial markets into chaos.

“We have damaged our international reputation because of what happened,” Bailey told the House of Commons select committee.

It’s a view likely to be shared in the Treasury as new Chancellor Jeremy Hunt today announces “tough decisions” in the bid to close the government’s fiscal black hole.

Hunt will say sacrifices are needed as he seeks cuts and tax increases of up to £60bn.

Appearing before MPs, Bailey described the reaction in Washington, where he attended the International Monetary Fund’s annual meeting, as the chaotic aftermath of Kwarteng’s mini-budget unfolded.

A strong sell-off in government bonds, known as gilts, wreaked havoc on both pension funding and the mortgage market and prompted a £65bn emergency intervention by the Bank.

“People said, ‘We didn’t think the UK would do this,’ recalls Bailey. “It will take longer to rebuild that reputation than to correct the gilded curve.”

Bailey said ‘we all have a part to play’ in restoring the UK’s global position.

The comments came on the same day the figures showed inflation of 11.1 percent in 41 years and after the bank recently predicted the UK could be on the brink of a two-year recession.

The bank’s deputy governor, Ben Broadbent, gave a glimmer of hope when he told MPs that the relatively superficial downturn might be shorter than feared.

“The last two or three quarters of that projected decline in GDP are quite small, so it shouldn’t take much effort to shave a few quarters off the expected length,” he said.

Meanwhile, the pound, which reached an all-time low against the dollar following the mini-budget, has recovered while gold markets have stabilised.

Markets were surprised by Kwarteng’s tax giveaways, while at the same time sidelining the Office for Budget Responsibility, which is supposed to control Treasury amounts.

It led traders to quickly raise their outlook for next year’s peak interest rate from around 3 percent to more than 6 percent.

That was partly because the instability led markets to place a ‘risk premium’ on the UK of 1.7-1.8 percentage points, something which Bailey told MPs has now largely dissipated.

“I would say most of it has come out in the markets… [but] it’s probably not back to zero,” he said. Bailey said he spoke to Hunt about once a week, compared to once a day with Rishi Sunak when he was chancellor at the start of the pandemic.

Not knowing what would be in the fall statement, he said, “I spoke to the chancellor last Friday, but we didn’t discuss what would be in the package.”