North East business leaders have urged the Government to set out to a clear strategy to reassure markets as they warn it is ‘looking increasingly difficult to regain confidence’.

John McCabe, chief executive of the North East England Chamber of Commerce, said the UK’s economy is “being driven with the both the accelerator of the government’s stimulus package and the brake of the Bank of England’s interest rate policy pushed hard to the floor.”

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The Bank of England has signalled it is ready to ramp up interest rates to shore up the pound as Chancellor Kwasi Kwarteng insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth.

After a day of turmoil in the markets on Monday which saw sterling slump to a record low against the dollar, the Chancellor sought to reassure City investors he has a “credible plan” to start reducing the UK’s debt mountain.

However, the Bank’s chief economist Huw Pill warned they “cannot be indifferent” to the developments of the past days – seen as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.

“It is hard not to draw the conclusion that all this will require significant monetary policy response,” Mr Pill said in a speech to the Barclays-CEPR International Monetary Policy Forum.

“We must be confident in the stability of the UK’s economic framework.”

The Northern Echo:

After two days of big changes, the pound settled down on Tuesday, trading at around 1.08 dollars for most of the day, deviating only briefly with a two cent drop.

London’s top stock index, the FTSE 100, was also subdued, trading up by less than 0.1% on Tuesday afternoon while gilt yields – reflecting the cost of Government borrowing – fell by around 3%, but were still more than a quarter higher than just a week ago.

But with some analysts predicting the base rate – currently standing at 2.25% – will have to rise to as high as 6% next year, some lenders began withdrawing some mortgages amid uncertainty over how far they will rise.

The sell-off of sterling came after investors took fright over Mr Kwarteng’s mini-budget on Friday when he unveiled a massive £45 billion tax cut funded by Government borrowing.

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Mr McCabe said: “The overall effect of a weak pound will be to add more inflationary pressure on businesses that are already facing sharply rising costs.

“Products and services that are imported from abroad are going to be more expensive and with the ongoing cost of living crisis these costs can’t be passed on to consumers.

“The government needs to set out a clear strategy in order to reassure the markets. It’s looking increasingly difficult to regain such confidence while the UK’s economy is being driven with the both the accelerator of the government’s stimulus package and the brake of the Bank of England’s interest rate policy pushed hard to the floor.”

At a meeting on Tuesday with institutional investors, the Chancellor reaffirmed his intention to explain how he will get debt falling as a percentage of GDP in a medium term fiscal plan to be published on November 23 alongside a new set of economic forecasts from the Office for Budget Responsibility.

He also emphasised the importance of the “supply side” reforms ministers will be setting out in the coming weeks, including his “Big Bang 2.0” reforms to further liberalise the financial market regulations, in supporting growth.

“We are confident in our long-term strategy to drive economic growth through tax cuts and supply side reform,” he told them, according to a Treasury readout of the meeting.

“We have responded in the immediate term with an expansionary fiscal stance on energy because we had to. With two exogenous shocks – Covid-19 and Ukraine – we had to intervene. Our 70-year-high tax burden was also unsustainable.

“I’m confident that with our growth plan and the upcoming medium term fiscal plan – with close cooperation with the Bank – our approach will work.”

His comments came amid reports that Liz Truss had initially resisted moves by the Treasury on Monday to announce the new medium term fiscal plan in order to calm the markets.

Government sources did not deny the Prime Minister and Chancellor had met to discuss the issue but insisted suggestions it had been an “argumentative” encounter and descended into a “shouting match” were wide of the mark.

Andrew McPhillips, Chief Economist at the Northern Powerhouse Partnership, said “The falling value of the pound should be a positive for the region’s exporters though that effect is clearly reduced if they need to import their materials. As commodities such as oil are generally priced in dollars it also means further upward pressure on petrol prices, impacting those that rely on their car.

“With the government’s mini-budget also leading to fears that inflation could increase further, we now see the Bank of England readying itself to increase interest rates with expectations of 6% next year. The most obvious impact will be when people come to remortgage as their fixed rate deals end with many facing large increases in repayments if Bank Rate does hit levels of 6%.

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“But there will also be wider disruption in the housing market with lenders likely to remove low deposit mortgages as the outlook for the UK economy worsens and first time buyers struggling with affordability. With the average house price in the North East having increased by over 25% over the past five years, there is a real risk of this being slowed or even potentially reversed in the coming months.”

Despite a calmer day on Tuesday, many Conservative MPs remain deeply concerned about the political fallout from the tumultuous start to Ms Truss’s premiership.

With a YouGov poll for The Times showing Labour opening up a 17-point lead, some MPs who did not support her in the leadership contest have privately questioned whether she is up to the job.

Mel Stride, the chairman of the Commons Treasury Committee, who backed Rishi Sunak for the leadership, said the party’s reputation on the economy was “in jeopardy”.

He said the country was in “an extremely difficult situation” with higher borrowing costs than Italy or Greece and that it was essential to rebuild confidence in the wake of the Chancellor’s “unfunded” tax promises.

“That really I think is the part that has spooked the markets, because those tax cuts have got to be paid for,” he told BBC Radio 4’s The World at One.

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