Install new PM by Tuesday or risk higher interest rates, former cabinet secretary warns Tories

Liz Truss’s successor might not emerge for another week – but Gus O’Donnell warns that is too late

The new prime minister must be in place by Tuesday to avoid the risk of a market backlash and higher interest rates, a former cabinet secretary is warning.

Liz Truss’s successor might not be known until next Friday – if party members are allowed to pick the winner – but Gus O’Donnell said that could be too late to ensure economic stability.

A week-long contest could see the new prime minister delay the planned de-facto budget on 31 October until after the Bank of England next sets interest rates on 3 November, he argued.

“I think everyone will be hoping that the leadership election is finished very, very quickly, because we would like to stick with the 31 October date,” Lord O’Donnell told BBC Radio 4.

“The monetary policy committee meets 3 November. If there’s still uncertainty, then you can see them going further on interest rates – and that’s not ideal in any circumstance.

“So I think everyone will be trying to say, ‘please, please, can we get this done quickly’?”

The comments will increase pressure on the candidate with the least support among MPs to throw in the towel on Monday – to avoid the race being settled by members in an online ballot.

But a former aide – now opponent – of Boris Johnson says he is enjoying a surge in support that will put him in the contest, making a longer race more likely.

Tim Montgomerie predicted the former prime minister, thought to be about to fly back from a Caribbean holiday, is “not only likely to pass the 100 MPs’ threshold but could get close to 140”.

The Treasury watchdog, the Office for Budget Responsibility, must – by the end of next week – be able to scrutinise the huge spending cuts and growth measures to be announced on 31 October, to make its forecast.

But the next prime minister is likely to want to rework the “budget” and might even appoint yet another chancellor, replacing Jeremy Hunt.

Tory party chiefs will announced an “indicative ballot” among MPs of the two final candidates, to underline who has most support at Westminster and put pressure on the ‘loser’ to pull out.

But Mr Johnson, if he is in that position, would be confident of triumphing in the members’ ballot, to be staged electronically despite security warnings.

Lord O’Donnell also warned of choosing another prime minister unable to unite the Tory party – after Ms Truss was driven out by her MPs after just 45 days.

“What the markets will look at as well is, not just if it’s done quickly, but is it done in a way that delivers a leader that can then lead the party and have a majority in the House of Commons?” he said.

The budget measures would need Commons approval, but “uncertainty about whether it will go through the House or not” would also trigger a market reaction.