By Ian McConnell
THE BANK of England faces “less pressure to increase interest rates aggressively” because of UK Government U-turns on tax following the September mini-Budget, the prospect of further fiscal policy tightening and calmer financial markets, Oxford Economics said yesterday.
The economic advisory firm forecasts the Bank’s Monetary Policy Committee will now raise UK base rates by three-quarters of a point to 3% next week.
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The median forecast in a poll of economists by Reuters conducted between October 18 and 25 was also that the MPC would raise rates by three-quarters of a point on November 3. However, while this view was held by 18 of 30 respondents, 10 forecast a full-point rise, one predicted a 1.25-point increase and one saw rates being hiked by 1.5 points.
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Oxford Economics said: “Financial market and political turbulence have been very evident in the few weeks since the MPC’s most recent meeting on September 22. Fortunately, the financial and political backdrop has calmed significantly after Government U-turns on most of the tax cuts which had been announced in the ‘mini-Budget’ on September 23 and by the prospect of fiscal policy being tightened further in November’s autumn statement under new Prime Minister Rishi Sunak.”
It added: “As a result, the scale of the rise in Bank Rate anticipated by investors as being necessary to reassert macroeconomic credibility, counteract the inflationary effects of looser fiscal policy, and prevent a further drop in sterling has receded. Market expectations for a November rate rise have been pared back from around 150bps (basis points) in late September to just above 75bps...”
Former chancellor Kwasi Kwarteng, in his mini-Budget, reversed a planned rise in UK corporation tax from 19% to 25% from next April. This rise, expected to raise about £18bn a year, was then reinstated. The abolition of the 45p top rate of income tax in the mini-Budget has been reversed.
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