LONDON (Reuters) - Britain’s interest rates would rise almost immediately if the government were to ease fiscal policies aimed at reducing a record peacetime budget deficit, Chancellor George Osborne said on Tuesday.
Inflation running at more than double its 2 percent target, Osborne said the government was committed to working with the Bank of England to maintain a “strong anti-inflation stance.”
The Bank of England has kept rates at a historic low of 0.5 percent since March 2009 to bolster a recovery from the country’s deepest recession since World War Two.
“I think if we were to loosen fiscal policy now...there would be a monetary response almost immediately with a tightening of monetary policy and an increase in interest rates,” Osborne told a parliamentary committee.
While stressing the central bank’s independence, Osborne said he shared Bank Governor Mervyn King’s analysis on why inflation was high, and said the government and the Bank’s rate-setting Monetary Policy Committee would work in tandem to try to curb price pressures.
“I’ve made it very clear that we are absolutely committed as a government to working with the independent MPC to maintaining a strong anti-inflation stance,” he said.
Osborne said inflation and the euro zone sovereign debt crisis posed a double challenge to the UK economy, which suffered a shock 0.5 percent contraction at the end of 2010.
“We have to negotiate our way between those twin threats,” he said.
The government wants to eliminate most of a deficit of 10 percent of national output before the 2015 election.
It is cutting public spending by 81 billion pounds over the next four years, with the estimated loss of hundreds of thousands of public sector jobs.
The Labour Party has accused the government of threatening the recovery by cutting public spending too quickly and too deeply.
Osborne said the cuts and tax rises were needed if the government is to eliminate the bulk of the budget deficit by 2015 and maintain its triple-A sovereign debt rating.
He said he had received a letter from the Organisation for Economic Co-operation and Development that said his Budget announcement last week “keep the United Kingdom on the road to stability.”
Reporting by Peter Griffiths; Editing by Ron Askew