Above: The Chancellor Jeremy Hunt makes a statement from HM Treasury. Image: Gov.uk.
The Bank of England will not have to raise interest rates as high as previously feared following the recent interventions by the UK's new finance minister.
Jeremy Hunt, who was installed as Chancellor of the Exchequer on Friday, today reversed all the tax cuts announced by his predecessor on Sept. 23, while saying the Energy Price Guarantee would now end in April 2023.
The developments are part of a major push by Hunt to restore market confidence in the UK.
For the Bank of England the developments are significant.
Firstly, the reversal of planned tax cuts means fiscal settings will now be tighter than expected, placing less pressure on policymakers to hike interest rates to tackle inflation.
Secondly, the prospect of energy bill increases in April means near-term inflation risks are higher but longer-term they are lower, again meaning the potential peak in Bank Rate will come down.
"With the fiscal stance now set to be less loose than previously planned (the tax U-turns alone equate to a tightening of around 1.3% of GDP) and the risk premia on UK assets falling, the BoE will be under less pressure to take an aggressive approach to raising interest rates," says Andrew Goodwin, Chief UK Economist at Oxford Economics.
David Page, Head of Macro Research at AXA Investment Managers, says UK fiscal stimulus has now been slashed from around 11% of GDP over five years to around 4.5%, (plus the subsequent energy scheme).
"Based on today's announcement it is apparent that there will be much less stimulus in the economy relative to supply. This could mean the pace of monetary policy tightening around interest rates could slow down, relative to expectations after the September mini-Budget," says Barret Kupelian, senior economist at PwC.
The reversal of tax cuts would deliver an additional £32BN to Treasury coffers per year, Hunt said in a televised statement.
Hunt also said the Treasury would embark on a review of how best to protect businesses and households from rising gas and electricity prices.
The current Energy Price Guarantee that caps energy bills - the new government's largest spending commitment - will now end in April.
This means there could be another jump in inflation in April, however, this is entirely dependent on wholesale gas prices, which are currently falling rapidly.
A popular gauge of market expectations for Bank Rate shows a sharp fall since Hunt's most recent intervention.
Bank Rate is now predicted to peak at 5% next spring, down from 6% two weeks ago.
"We think investors' expectations will continue to retreat, coming down closer to our forecast of a peak in Bank Rate of 4%," says Goodwin.
Economists at NatWest revise their Bank Rate call for a hike of 75 basis points in November, down from 100bp previously, taking the rate to 3.0%.
They maintain a forecast for a further 75bp hike in December and a 50bp move in February, taking the peak to 4.25%.
They see downside risks to the December and/or February prediction.