Liz Truss’s multi-billion pound tax-cut plan would put her on collision course with the Bank of England at a time of deep economic crisis because it is likely to respond with higher interest rates to rein in runaway inflation, respected experts have said.
Ms Truss’s plans for £30bn-worth of near-immediate tax cuts would come into “conflict” with the Bank’s desire to bring soaring prices under control and could lead to even higher interest rates, which would push up people’s mortgage repayments, the Institute for Fiscal Studies (IFS) told i.
It came as the Foreign Secretary’s campaign team reiterated her commitment to the Bank’s independence despite her plans to review its mandate, and criticism from her supporters of its failure to rein in inflation, which is now predicted to hit 13 per cent despite a 2 per cent target.
Ben Zaranko, senior research economist at the IFS, said Ms Truss’s plans were meanwhile “exacerbating” the potential “tension” between he future Government and the Bank.
He explained that the Bank’s decision to raise interest rates to 1.75 per cent on Thursday showed it has “reached the conclusion that the only way to squeeze inflation and get it out of our system is to have a prolonged recession and they are going to increase interest rates to bring inflation down”.
By contrast, Ms Truss’s “big package of tax cuts” would “boost demand”, putting “cash back in people’s pockets or back in companies’ bank balances”.
“Is that just going to be met by further rounds of interest rate increases in the Bank of England who are just as determined if they were before to bring about a recession to bring down inflation, it’s just that now they need bigger interest rate rises to do so?
“What you’re setting up there is conflict between potentially the Government and the independent Bank of England, which is being exacerbated by Truss saying she’s going to look at the mandate, you’ve got Suella Braverman discussing independence in the news.
“That kind of tension undoubtedly exists.”
The warning is likely to be seized on by Ms Truss’s leadership rival Rishi Sunak, who has warned that her tax-cutting plans will lead to higher interest rates, “increased payments on people’s mortgages”, and make “everyone poorer”.
The criticism of the Bank’s response to building inflation last year has prompted Conservative leadership candidate Liz Truss to pledge to re-examine the Bank’s mandate to make sure it has a “tight enough focus on the money supply and on inflation”.
Business Secretary Kwasi Kwarteng, who is backing Ms Truss for leader, also called for the Bank’s targets and operations to be reassessed…