Borrowing costs in Britain are projected to nearly treble to 6.25 per cent by May, after the Bank of England’s chief economist warned the government’s new debt-laden economic plan required a “significant monetary response”.

Huw Pill’s intervention came as Kwasi Kwarteng, chancellor, prepared to reassure markets that he would control debt in a new medium-term fiscal plan, with ministers hoping to pledge that debt will fall within five years.

The new plan, to be published in November, implies tight public spending controls continuing into the second half of this decade, as the chancellor tries to restore order to the public finances after announcing £45bn of debt-funded tax cuts.

Futures markets are now forecasting that interest rates will hit 6.25 per cent by May, the highest level in 25 years, as the BoE attempts to prop up the pound and rein in inflation. Rates currently stand at 2.25 per cent, already the highest since the global financial crisis.

The turmoil on the markets has created the first tensions between Kwarteng and Liz Truss, prime minister, as they grappled with the fallout of the chancellor’s economic statement last week.

Truss was initially reluctant for the Treasury and BoE to issue statements on Monday to support the pound — preferring not to react to market turmoil — but eventually agreed with Kwarteng that it was the right course of action.

The tensions, first reported by Sky News, have been confirmed by senior government officials. One said the exchanges were “testy” and that relations between No 10 and No 11 were already under strain.

That was denied as “weapons grade bollocks” by allies of Truss, while others said there had been no raised voices in the meeting; Kwarteng and Truss are longstanding allies.

In the Treasury statement issued on Monday, Kwarteng promised to publish a new road map for dealing with debt on November 23, replacing existing fiscal rules that say debt must be falling as a share of GDP within three years.

Those familiar with Kwarteng’s thinking have told the Financial Times that the new rules will say that debt must be falling within the five-year forecast period of the independent Office for Budget Responsibility, which will publish its forecasts on the same day.

Kwarteng told City bosses on Tuesday he would publish “a credible plan to get debt to gross domestic product falling”. Tight public spending totals already agreed will remain in place until 2025, with tough controls expected to remain into the future.

Futures markets are now betting on a wave of interest rate hikes by the bank in coming months, following Pill’s comments.

Speaking a day after sterling hit an all-time low against the dollar, Pill had said the Bank of England’s Monetary Policy Committee was “certainly not indifferent” to the sell-off in the pound and gilt markets.

As the gilt sell-off intensified, 10-year yields rose by 0.26 percentage points to 4.5 per cent, the highest level since 2008. Thirty-year borrowing costs rose to 5 per cent, the highest since 2002, ahead of a sale of new 30-year debt later this week.

Pill highlighted the combined effect of the government’s new fiscal stance, “significant” reaction in the markets and the broader context of rising interest rates in other countries. “All this will require a significant monetary response.”

However, he signalled that the central bank did not plan to act before its next scheduled meeting in November, pushing back against calls from some investors for an emergency interest rate rise to shore up the currency and restore confidence in the UK economy.

He said the best time to carry out a “necessarily comprehensive assessment” of not just fiscal policy but also energy and labour market developments would be when the BoE updates its forecasts alongside its November decision on interest rates.

Pill said that when the BoE last published forecasts for the UK economy in August they had shown the economy falling into a prolonged recession, partly because the government had yet to set out measures to protect households and businesses from higher energy prices.

This had created a difficult trade-off, because aggressive action to curb inflation would spark a severe downturn, he said.

Now that the government had set out fiscal plans that would support household incomes, “that has freed monetary policy to do its job”, said Pill, adding: “That freedom will have to be used.”

The pound was trading flat by late afternoon trading in London at just under $1.07 giving up earlier gains. Sterling has fallen about 20 per cent against the US currency this year and remains close to its lowest levels since 1985.

UK high-street banks have begun pulling mortgage loans in response to rising yields, with mortgage rates expected to rise substantially.