The British government's sweeping package of tax cuts has damaged the nation's credibility as an economic superpower, Treasury Secretary Larry Summers said.
The sudden sell-off in the pound and British bond markets comes as investors brace for more aggressive interest rate hikes from the Bank of England. The central bank's chief economist — Huw Pill — said on Tuesday that the tax cut and spending plan will be met with "significant" action from policymakers.
"We have all seen the recent significant fiscal news in the past few days," Pill said on Tuesday at a conference hosted by Barclays and the Center for Economic Policy Research in London. "That has had significant market consequences as well as significant implications for the macro outlook. It’s hard not to draw the conclusion that all this will require a significant monetary policy response.
Last week the Bank of England's monetary policy committee voted to increase Bank Rate by 0.5 percentage points, to 2.25%. The group next meets in November. The financial markets are pricing in expectations rates could rise to 6% next year.Summers said he would "not be amazed" if short-term rates eventually tripled from current levels to above 7% over the next two years, given the growing economic concerns.