Higher mortgage payments not ‘necessarily a bad thing’, Liz Truss economic guru says after mini-Budget

The radical tax-cutting mini-Budget will push interest rates and mortgage repayments higher than they would have been but it is not “necessarily a bad thing”, one of Liz Truss’s economics gurus has said.

Interest rates are likely to rise to 4-5 percent and that is “perfectly reasonable”, economist Julian Jessop said after Chancellor Kwasi Kwarteng spent tens of billions of pounds to cut taxes in a dash for growth.

It comes after the Prime Minister was forced to distance herself from another economist close to her team, Patrick Minford, who said in July that her tax cuts could result in interest rates of up to 7 percent.

Mr Jessop, who is chief economist at the Institute of Economic Affairs (IEA) think-tank and is close to Ms Truss’s team, admitted Mr Kwarteng’s mini-Budget was a “small gamble” but insisted it was worth taking to get the UK out of a “doom loop” driven by weak growth.

He admitted the policies could force the Bank of England (BoE) to hike interest rates further than otherwise predicted to curb inflation driven by the economic stimulus of tax cuts.

But he insisted the Bank’s policy had in recent years been “too loose” and that it was right to get interest rates back to “more normal and more sustainable levels”.

Mr. Jessop told the BBC Politics Live: “This probably will mean higher interest rates than we would otherwise have had but I don’t think that’s necessarily a bad thing, it’s about rebalancing the policy mix.”

He insisted there was no “inconsistency” between Mr Kwarteng’s plans to stimulate growth and the BoE’s desire to curb spending through higher interest rates “because if you want strong, long-term economic growth, you also need to have low inflation, and low inflation of course is an important way of boosting households too”.

But Mr. Jessop admitted there were “trade-offs” to the plan, which could result in higher mortgage repayments.

“If you look for example at any increase in mortgage interest rates, that will be I think more than offset by the fact that inflation would be lower than it would otherwise have been over the medium to longer term because of what the Bank of England is likely to be doing over the coming months in terms of getting rates back towards a more normal level.

“‘Getting interest rates back towards something like 4 percent is perfectly reasonable, I suspect that the new normal for interest rates will probably be somewhere between 4 and 5 percent.

“If the inflation target remains at 2 percent, we get real growth at 2.5 on top of that, we are looking at 4 to 5 percent interest rates.”

Paul Johnson, director of the independent Institute for Fiscal Studies (IFS), agreed that the plans would “lead to the Bank of England increasing interest rates more than they otherwise would do” as he described the mini-Budget as a “big gamble” .

He said it would lead to Government borrowing increasing to more than £120bn in three years’ time, posing a threat to the stability of the public finances.

But he added that “it worries me more” that the Government is “putting tens of billions into the economy now at a point when inflation is very high” as the measures could further fuel soaring prices.

“That worries me more than the fiscal situation because you can always undo the fiscal situation, you can always raise taxes later on or do other things to help that.

“If inflation takes off that’s much harder to get under control”.

Mr Johnson also pointed to soaring gilt yields – the interest rates required for the Government to pay back debt – as he suggested the mini-Budget was spooking financial markets.

With the pound plummeting to a 37-year low against the US dollar, Mr Johnson said: “We’ve already seen that the markets are worrying about the macroeconomic stability here because we’re seeing a huge increase in the rates they’re requiring on Government debt.”

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