(Bloomberg) -- The UK government’s “big gamble” in announcing unfunded tax cuts means the Bank of England now needs to raise interest rates by at least 100 basis points before its next meeting on Nov. 3, according to Mohamed El-Erian, chief economic adviser at Allianz SE.

An even bigger hike of 150 basis points before then “is not off the table,” as central bankers should contain the damage the tax-reduction announcement has caused to UK households and businesses, which were already dealing with a cost of living crisis as inflation soars.  

“It’s a whole series of damage,” he said in an interview with Jonathan Ferro on Bloomberg Television. “Then, there’s a broader issue, which is the loss of credibility in policy making, which means that policy makers will have to go beyond what they would normally would’ve had to go as the Fed is doing in the US.”

While Chancellor of the Exchequer Kwasi Kwarteng’s structural reforms promoting growth and the stabilization of energy prices were sound policies, the unfunded tax cuts undermined the first two and are now counterproductive, he said in a separate interview earlier with Francine Lacqua. 

The International Monetary Fund on Tuesday urged the UK government to reconsider the massive tax reductions unveiled Friday. The measures shocked investors, roiled markets -- particularly trading in the pound -- and led to at least $500 billion in combined UK stock and bond market losses. 

If the government wants to stabilize the situation they should postpone the large unfunded tax relief and provide more information on the growth measures, according to El-Erian. That, and a BOE rate hike, would reverse some of the price moves that are going to have a “huge impact on economic prospects and inequality,” he said.

“We knew that the exit from the paradigm of easy money was going to be hard,” said El-Erian, who is also a Bloomberg Opinion columnist. “We thought that the major challenge was going to be the balance between inflation and recession risk. The question now is financial stability, and it turns out that there’s also significant financial stability risk.” 

“This is an even more complicated exit and it doesn’t help that central banks are late,” he said.

(Updates with second Bloomberg TV interview throughout)

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