The chancellor’s mini-budget “complicated matters” for the Bank of England as it battled to bring down inflation, the International Monetary Fund’s chief economist has told Sky News, as he warned the coming years would “not be very pleasant” for the global economy.
In an interview at the IMF’s annual meetings in Washington, Pierre-Olivier Gourinchas said the tax cuts announced by Kwasi Kwarteng late last month threatened to cause “problems” for the UK economy, coming as they did when the Bank was attempting to raise interest rates.
“When the mini-budget was announced at the end of September, there was a concern on our side,” he said.
“While the impulse to protect households and businesses and try to stimulate growth… are great objectives that we would very much support, at the same time, there was the sense that the budget, as it was announced, was suggesting a very stimulative effect in the short run, and something that would have complicated matters for the Bank of England’s efforts to bring down inflation,” Mr Gourinchas added.
He said the IMF welcomed the fact that the chancellor will provide further plans in his medium-term fiscal plan later this month, and that it would assess them when they arrived.
However, the comments come amid a fierce debate about whether the mini-budget was or was not responsible for some of the disturbances in money markets in the ensuing months.
Business Secretary Jacob Rees-Mogg suggested earlier on Wednesday that blaming the mini-budget was speculation.
Mr Gourinchas indicated that the disturbances in UK markets, which have caused problems for some pension schemes reliant on derivative strategies which can no longer function following sharp increases in interest rates, were part of a broader pattern.
“As interest rates rise, you see that segments of the financial markets may not be optimised for higher rates, so they need to unwind trades, they need to reposition themselves. This can sometimes come with some liquidity pressures, some financial vulnerabilities,” he said.
However, for the world economy as well as the UK, Mr Gourinchas warned that in economic terms, the “worst was yet to come”.
“Inflation is still going to be high [next year],” he said. “We’re going to be in an environment where people are going to feel more pain in terms of their incomes and in terms of growth – we’re seeing a third of world output in contraction territory – two consecutive quarters of negative growth.
“Inflation will not be back to target but growth will be below, so we will hear people saying, ‘Oh, this is not working. We need to do something else. We need to change the course of monetary policy.'”
Mr Gourinchas continued: “And this is why we’re saying: no, wait a minute. We know this is going to take some time. We know this is not going to be very pleasant, but central banks need to get on with this and bring inflation down.”