Is Jeremy Hunt bailing out Bailey?

There is a conundrum at the heart of Jeremy Hunt’s comments leading up to the Autumn Statement. Hunt describes inflation as an ‘​​evil’ that ‘erodes the pound in your pocket’: uncontroversial. So Autumn Statement, he says, has been designed by his Treasury to ‘help the Bank of England bring down inflation.’

But controlling inflation is the Bank of England’s remit, so any action will be indirect. By tightening fiscal policy, Hunt is lifting pressure off the Bank to keep pushing raising interest rates. This will be by design on the part of the Treasury. After Liz Truss and Kwasi Kwarteng’s disastrous mini-Budget, markets were predicting rates headed for over 6 per cent, threatening to throw both British borrowers and also the government’s own interest payments into a rather dire state. 

But hiking interest rates is also the best tool we have to tackle inflation. While a fast dash to higher interest rates is far from ideal, it is also obvious the Bank is looking for wriggle room to stay doveish – and that includes avoiding repetition of its most recent 0.75 percentage point hike, taking the headline rate to a 14-year high of 3 per cent.

While the details of Thursday’s Autumn Statement are still under wraps, we have some sense about what’s coming. Jeremy Hunt has been clear that everyone is going to be paying more tax after his announcements, which is expected to come in the form of a continuous freeze of tax thresholds, resulting in significant ‘fiscal drag’: when workers get pulled into higher tax brackets. Meanwhile the Chancellor is expected to stick to the last spending review – with some notable exceptions, which means real-terms cuts for a host of government departments and spending programmes. We also know the ‘energy price guarantee’ is being restructured with plans to cut back support from April next year.

The latter may, hopefully, prove a less harsh move as wholesale energy prices have been on a consistent path downwards for some time now. But the tax hikes and spending cuts will be painful. Some blunt decisions will have been made in haste. 

The delicate balance between fiscal and monetary policy is all rather vague because it has to be: the Bank’s governor cannot instruct the Treasury how much fiscal tightening he needs to keep interest rates lower, nor can the Treasury instruct the Bank on where interest rates should settle. But while much of the Treasury’s drive right now is to restore market confidence, an unspoken decision seems to have been made: to lean back on fiscal policy to do that, allowing monetary policy to be approached with a lighter touch.

It may well be the right pivot given the circumstances, but it’s far from clear that the right balance has been – and will be – struck.