In the wake of a financial markets selloff, the government said it was working closely with the Bank of England
The U.K. government, after a punishing week for the pound and bond market in London, tried Tuesday to reassure investors that it is working to better coordinate with the Bank of England as Prime Minister Liz Truss’s tax cuts and energy subsidies complicate efforts to control spiraling inflation.
U.K. Chancellor of the Exchequer Kwasi Kwarteng said he was meeting Bank of England Governor Andrew Bailey daily.
“We are working very closely now,” he told a round table of executives from major banks. He also tried to reassure investors that his government, which last week sparked a financial markets selloff by announcing the biggest tax cuts in a generation, in addition to new spending, hadn’t lost fiscal discipline and had a credible plan to cut debt in years to come, adding that “with close cooperation with the Bank—our approach will work.”
The central bank and the government now find themselves pulling in different directions on the U.K. economy, a dynamic that has alarmed investors. While the central bank has been raising its key interest rate since December to try to contain a surge in consumer prices, the government tax cuts will stimulate consumer demand, undermining the central bank.
“Clearly, there is a fundamental conflict between the Truss government’s so-called growth program of large-scale spending and the bank’s need to reduce inflation,” said Adam Posen, president of the Peterson Institute for International Economics and a former BOE policy maker.
Efforts by both the government and central bank to calm markets Tuesday had mixed results. The pound closed largely unchanged after one of its largest two-day declines on record, a drop that will further stoke inflation by raising the price of imports. Borrowing costs for the U.K. government continued to rise, with the yield on the benchmark 10-year U.K. bond rising 23 basis points to 4.51%.