- El-Erian said the Bank of England would have to raise rates by 100 basis points to save the plummeting pound.
- That’s if the UK chancellor doesn’t backtrack on his tax cut plans that kept the markets turning.
- “Whether [Kwasi Kwarteng’s] pay no attention, what happens in the markets could snowball,” El-Erian said.
Mohamed El-Erian has asked the Bank of England to raise UK interest rates by a full percentage point to appease markets spooked by the government’s plan for deep tax cuts.
The pound fell to a record low of $1.035 against the US dollar on Monday after Chancellor Kwasi Kwarteng, Britain’s finance minister, last week presented a package of debt-funded tax cuts worth 45 billion pounds ($48.5 billion). He doubled down on tax plans on Sunday, saying, “There’s more to come.”
Economists, lawmakers and strategists now believe the BOE will be forced to step in with an emergency interest rate hike to calm nerves.
Speaking on the BBC’s ‘Today’ programEl-Erian laid out his thoughts on what BOE Governor Andrew Bailey should do.
“If I was the governor and the chancellor didn’t change his plan, I would raise interest rates. And not by a little – by 100 basis points, by a full percentage point, to try to stabilize the situation,” the chief economist said. said Monday.
Investors dumped the pound amid fears it could fuel Britain’s already searing inflation and dramatically increase the government’s debt burden, which threatens to hurt the country’s already struggling economy.
The pound fell 4.7% during Asian trading hours to $1.0350, its lowest level since 1971, when the UK switched to a decimal currency system.
Economists have called the government’s planned tax cuts fiscally irresponsible as the UK faces a cost of living crisis brought on by high levels of inflation.
Kwarteng should “be very careful because if he’s not careful what happens in the markets could snowball and undermine what he’s trying to do,” El-Erian said.
Allianz’s economic adviser explained what a continued decline in the pound could mean for consumers. He said their purchasing power would erode and they would become more uncertain about their future income. Also, the money they have in the financial markets will be at risk, he said.
“You get what economists call a negative income effect,” he said.
According to El-Erian, Kwarteng has two options that could restore market stability. “Choice number one is that he recalibrates his package – politically difficult, but economically necessary,” he said.
“Choice number two is that he leaves it to the Bank of England. And in that case the Bank of England should call an emergency meeting, as it will not meet again until November.”
Britain’s central bank raised interest rates by 50 basis points last Thursday and is not expected to meet again until November 3. But the BOE can call an emergency meeting in exceptional circumstances – even though El-Erian said it’s not pretty. option for Bailey.
“That in itself goes against him,” he said. “Again, the image is of driving a car, with the chancellor’s foot on the accelerator and the governor’s foot on the brake. This is not a good way to stimulate the UK economy.”