Turbulence in Financial Markets: Rees-Mogg Cites Bank of England's Interest Rate Decision Over Mini-Budget

Strategic Insights -

Business Secretary Jacob Rees-Mogg has insisted that the Bank of England's failure to raise interest rates in line with the US is driving turbulence in financial markets, rather than the mini-budget announced by Chancellor Kwasi Kwarteng. The statement comes as Prime Minister Liz Truss prepares to face MPs with the Government battling for credibility over its economic policies amidst continued market volatility. Rees-Mogg pointed out that the difference in interest rate decisions between the Bank of England and the Federal Reserve could be a more significant factor in the market fluctuations than the mini-budget itself.

Key Takeaways:

  • Rees-Mogg suggests that the Bank of England's failure to raise interest rates as much as the Federal Reserve did may be a primary cause of market turbulence, rather than the mini-budget.
  • The mini-budget's announcements, as a percentage of GDP, were "not that enormous" and "not out of the run of the mill of events that come before Parliament."
  • The market response was "much more to do with interest rates than it is to do with a minor part of fiscal policy."
  • Britain's economy unexpectedly shrank in August, with GDP dropping by 0.3% between July and August.
  • The Bank of England intervened for the second time in as many days to buy up Government bonds, warning of a "material risk to UK financial stability" and "fire sales" of assets if it did not act.
  • The pound fell by 0.85% to 1.099 against the dollar on Wednesday morning, amidst continued unease among financial traders.
  • The Prime Minister and Chancellor are under pressure from MPs across a range of policy areas, including whether benefits will rise in line with inflation.

Statistics:

  • The pound fell by 0.85% to 1.099 against the dollar on Wednesday morning.
  • The Bank of England raised interest rates by 0.5 percentage points to 2.25% on September 22, while the Federal Reserve raised rates by 0.75 percentage points on the same day.
  • Britain's economy shrank in August, with GDP dropping by 0.3% between July and August.
  • The pound had risen as high as 1.1180 on Tuesday but slumped sharply after the governor's warning to pensions funds.
  • Sterling's value against the dollar was 1.099 on Wednesday morning.

Sources:

  • BBC Radio 4's Today programme, where Rees-Mogg was interviewed
  • Office for National Statistics, for economic growth data
  • The Bank of England, for interest rate decisions
  • Bloomberg, for market data and analysis
  • The Guardian, for news and analysis of the mini-budget and its impact on the economy