The Bank of England will next week consider how much to raise interest rates without having received any guidance from the government about its tax and spending policies, after Jeremy Hunt pushed back the date for this year’s “autumn statement”.
By shifting the date of the autumn statement – an event that will look and feel like a full-blown budget – from Halloween to 17 November, the central bank will be left in the dark about how far the Treasury will squeeze public spending.
Since Hunt abandoned almost all of the tax-cutting stimulus planned by Liz Truss, 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.
This calm may prove temporary if financial traders start to expect that Hunt will be more generous in the budget than his first comments gave them reason to believe.
At his first prime minister’s question time on Wednesday, Rishi Sunak backed Hunt with a message that emphasised 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.
If only Sunak’s messaging were clear. To please another audience, he also said: “We will always protect the most vulnerable” and restoring economic stability would be done “in a fair and compassionate way”.
Fair and compassionate policies cost money, and so Sunak’s statements leave the MPC to consider how the prime minister can find a way to be both Father Christmas and Scrooge as the festive season approaches.
If a majority of the nine-strong MPC caps the rise at 0.75 percentage points, this may be seen as a victory for Hunt and Sunak, vindicating the budget delay. Yet any such celebrations will probably be short lived.
Extra help for the poorest must mean larger spending cuts elsewhere in Whitehall, higher taxes or higher borrowing.
But a deflationary budget cannot allow for 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.
That is not all. Higher borrowing rates, even if they are restricted to a 0.75 percentage point rise, will still hurt mortgage payers and private renters, whose monthly rent bills are likely to increase as landlords pay more interest on their property loans.
Add to the mix the potential for a property price slump next year, and Sunak’s tactical victories may not take him very far.