UK: New budget and extra BoE rate hikes – UOB

Economist at UOB Group Lee Sue Ann comments on the announcement of the Growth Plan by Chancellor K.Kwarteng.

Key Takeaways

“UK Chancellor Kwasi Kwarteng unveiled his Growth Plan last Fri (23 Sep) with the aim of tackling high energy costs and inflation and delivering higher productivity and wages. His package of tax cuts was the biggest since 1972.”

“There is significant uncertainty surrounding the combined impact of the fiscal measures proposed, alongside higher interest rates and a slowing economy. Financial markets have thus reacted strongly and negatively to the government’s break with fiscal orthodoxy. GBP plunged by the most since Mar 2020, reaching the lowest in 37 years against the USD. UK gilts also suffered their biggest collapse since Mar 2020, with bond yields surging.”

“The obvious implication is that interest rates are likely to be higher for longer, with speculation even of a possible inter-meeting rate hike by the Bank of England (BOE), which we are not ruling out. We now look for the BOE to increase rates to 4.25% by year-end and 5.25% by end-1Q23.”