(Bloomberg) -- As Chancellor of the Exchequer Rishi Sunak prepares to deliver his latest budget, he will have one eye on whether a possible increase in interest rates will lift U.K. borrowing costs and further hamper his spending plans.
Writing for his high-school magazine back in February 1997, the then 16-year-old Sunak was worried that his predecessor as chancellor, Kenneth Clarke, would deter the Bank of England from doing the right thing to contain inflation.
Sunak was writing in a Winchester College magazine just three months before Labour’s Tony Blair swept to power. His Chancellor Gordon Brown immediately granted the central bank independence from political control.
“Economists amongst you will no doubt be aware of the chancellor and governor of the Bank of England’s disagreement over interest rate rises,” the teenage Sunak wrote about the differences between Clarke and Eddie George. “The chancellor claims there is no need for a rise to combat inflation. The governor points to Britain’s past bad management of inflation. How different election economics is from that of a prudent neutral.”
As the now 41-year-old Sunak prepares to deliver his budget to Parliament on Wednesday, inflation is again rising, and some investors anticipate the Bank of England will raise borrowing costs next week.
With more than 1 percentage points of hikes priced in by the end of next year, that path suggested by markets would imply one of the most aggressive monetary tightening cycles since the central bank was given a free hand to set policy in 1997.
The Treasury estimates every percentage point increase in interest rates, market borrowing costs and inflation adds 25 billion pounds to public borrowing annually. The result of the Bank of England’s massive bond buying since the pandemic began is that U.K. public finances are now six times more sensitive to interest-rate changes than they were before the financial crisis, according to the Office for Budget Responsibility.
In editions of the school magazine, the young Sunak also condemns continental European countries for signing up to the European Union’s Social Chapter, which he argued leads to higher labor costs. That contrasts with his current boss Prime Minister Boris Johnson’s government who has welcomed wage growth as one of the advantages of Brexit.
Marking himself out as a young Conservative, Sunak also penned a piece satirizing political correctness.
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