Sky News has learned that the mini-budget of the chancellor “complicated matters” at the Bank of England, as it fought to reduce inflation.
Pierre-Olivier Gourinchas, an IMF official, stated that the next few years will be “not very pleasant” for global economic growth.
He said that the tax cuts proposed by Kwasi Kwarteng late in the month could cause problems for the UK’s economy, as they did when it was trying to increase interest rates.
He stated that “when the mini-budget was revealed at the end September, there was concern on our part.”
“While we support the desire to protect households and businesses, and to stimulate growth…, are great goals that we would very much like to support, there was also the feeling that the budget as it was announced was suggesting a very stimulating effect in the short-run, something that would have complicated matters with the Bank of England’s efforts to reduce inflation,” Mr Gourinchas said.
He stated that the IMF was pleased to see that the chancellor has provided additional plans in his medium term fiscal plan later in the month and that it would evaluate them upon their arrival.
The comments are made amid intense debate over whether or not the mini-budget caused some of the financial market disturbances that followed.
Jacob Rees Mogg, Business Secretary, suggested Wednesday that the speculation behind the mini-budget was speculation.
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Gourinchas stated that disturbances in the UK markets have created problems for pension schemes that rely on derivative strategies, which are no longer able to function after sharp rises in interest rates. This was part of a larger pattern.
“As interest rates rise you will see that some segments of the financial market may not be optimized for higher rates. They need to unwind trades and reposition themselves. He said that this can sometimes lead to financial vulnerability and liquidity pressures.
For the UK and the world economy, however, Mr Gourinchas cautioned that the “worst” was still to come in terms of economics.
He said that inflation would still be high next year. “People will feel more pain in terms incomes and growth. We’re currently seeing a third world output in contraction territory. This is after two quarters of negative growth.
“Inflation won’t be back on target, but growth will be below. So we will hear people say, ‘Oh this isn’t working. We must do something different. We must change the direction of monetary policy.
“And this is the reason we’re saying no, wait a moment. This will take time, we know. This is going to not be pleasant. However, central banks must continue to work towards lowering inflation.