MercoPress. South Atlantic News Agency

UK's Autumn's budget delay to Nov 17, leaves BoE on the dark as to interest rate increase next week

BoE policymakers will meet on 3 November to decide an increase in the cost of borrowing to tackle the rate of inflation that has climbed above 10% in September.

Since British Chancellor of the Exchequer Jeremy Hunt pushed back this year's autumn statement (expected “mini budget”) --from Halloween to 17 November--. Bank of England who are meeting on 3 November have been left without guidance as to the government's tax and spending policies.

BoE policymakers will be meeting on 3 November to decide an increase in the cost of borrowing to tackle the rate of inflation that has climbed above 10% in September, five times its target.

This probably means that the autumn statement will look more like a full budget, with severe cuts in spending all along the different ministries, as is anticipated by the market and the strong recovery of sterling against the US dollar. However the BoE will be left on the dark as to how far the Treasury will squeeze public spending.

Since Hunt abandoned almost of the tax cutting announced by his predecessor, which many considered to be extremely inflationary, the betting in financial markets has been that the Bank will be more restrained.

Fears that its base rate was on course to jump by more than one percentage point above its current level of 2.25% have calmed and a rise of 0.75 percentage points is now being forecast.

At his first prime minister’s question time on Wednesday, Rishi Sunak backed Hunt with a message that emphasized how the government will need “to take difficult decisions to restore economic stability”.

The Bank’s monetary policy committee (MPC) may take this to mean that all Whitehall departments will have heavy spending restraints placed on them. Therefore the budget’s net effect will be deflationary, allowing the Bank to cap interest rates at a lower level than financial markets expect.

However to please another audience Sunak also said: “We will always protect the most vulnerable” and restoring economic stability would be done “in a fair and compassionate way”.

But the budget cannot allow taking on extra government debt.

When the annual deficit is on course to be £200bn this year – more than double the £99bn expected by the Office for Budget Responsibility when it last made forecasts in March – the chancellor must say he is going to reduce it. That leaves the Treasury to make deep spending cuts and increase taxes.

But what happens if Britain faces the biggest interest rate rise for 30 years with the BoE stepping up its battle against inflation. Even if the bank raises its base rate by 0,75 percentage points in November, this would be the biggest rise since Black Wednesday in 1992.

Some observers even believe the base rate could rise by a full percentage point to 3.25%cent on November 3. Warnings of such a dramatic move come despite efforts by top Bank officials to calm expectations of aggressive rate hikes.

Speaking in London, deputy governor Ben Broadbent suggested the rate may not rise as far as many analysts have forecast. He warned that rates of over 5 per cent would deliver a “material hit” to the economy.