By Andy Bruce, Kate Holton and Andrea Shalal
LONDON (Reuters) -The International Monetary Fund openly criticised Britain's new economic strategy on Tuesday, following another slide in bond markets that forced the Bank of England to promise a "significant" response to stabilise the economy.
Pressure piled on new finance minister Kwasi Kwarteng to reassess his policy, which unleashed turmoil in financial markets, as leading economists, investors and executives said that rock-bottom investor confidence would recover only if the plan was scrapped.
New British Prime Minister Liz Truss of the Conservative Party came into office on Sept. 6 saying she wanted to snap the economy out of years of stagnant growth with deep tax cuts and deregulation.
Kwarteng's plan, designed to support households and businesses with energy bills while doubling the long-run rate of economic growth. It requires an additional 72 billion pounds ($77.17 billion) in government debt issuance in this fiscal year alone, shocking investors, sending the costs of such borrowing even higher.
The IMF said the proposals, which sent the pound to touch an all-time low of $1.0327 on Monday, would likely increase inequality and it questioned the wisdom of such policies.
"Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy," an IMF spokesperson said.
"We are closely monitoring recent economic developments in the UK and are engaged with the authorities," the spokesperson said.
The IMF holds symbolic importance in British politics: its bailout of Britain in 1976 following a balance-of-payments crisis had long been regarded as a low point of modern British economic history.
The Fund said a budget due from Kwarteng on Nov. 23 would provide an "early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners."
Earlier in the day, BoE Chief Economist Huw Pill said the central bank was likely to deliver a "significant" rate increase when it meets next in November, adding that financial market upheaval would have a big impact on the economy and would be factored into its next forecasts.
British government bonds have sold off at a ferocious pace since the fiscal plans sparked a crisis of confidence in Truss's handling of the economy.
"It is hard not to draw the conclusion that this will require a significant monetary policy response," Pill told the CEPR Barclays Monetary Policy Forum.
With analysts still speculating about Britain's future financial direction, and markets volatile, a growing number of mortgage providers, unable to price loans, suspended sales.
U.S. economist Larry Summers, a former U.S. Treasury Secretary, said rocketing interest rates on long-dated British debt were a sign that credibility had been lost.
Shai Weiss, head of airline Virgin Atlantic, urged the government to stabilise economic affairs and accept that a move to fund huge tax cuts with vast government borrowing had left Britain in a weaker position.
"All of us in this room should be humble enough to say that if I said something that is not working, maybe I should reverse course, that is not a bad thing to do," he said at a press conference to announce an alliance with SkyTeam.
Two years before a general election is due, the opposition Labour Party has a 17-point lead over the Conservatives, a level not seen in more than two decades, according to a YouGov opinion poll for The Times newspaper.
The Bank of England and Treasury had released statements on Monday afternoon in the hope of reassuring investors, with the central bank saying it would not hesitate to raise interest rates if needed.
That immediately knocked the pound further, however, as some investors had bet on an emergency rate hike. It recovered slightly on Tuesday and was up 0.4% on the day at $1.0726 at around 2006 GMT.
Kwarteng met leading bankers, insurers and asset managers on Tuesday and said he was "confident" that his economic strategy would work when combined with supply side reforms.
But many remain unconvinced.
"(There) is still no clear sign that the source of the problem - the government's fiscal strategy - is being reversed or reconsidered," J.P. Morgan economist Allan Monks said.
"This will need to happen before November in order to avoid a much worse outcome for the economy."
($1 = 0.9330 pounds)
(Additional reporting by Kylie MacLellan and Muvija M; Editing by Catherine Evans and Grant McCool)