Britain on Wednesday defended its tax-slashing budget after the IMF argued it could increase inequality and worsen inflation, having already seen the pound hit a record low against the dollar.

Finance minister Kwasi Kwarteng's big tax cuts and energy price freeze, aimed at boosting the recession-threatened economy, appeared to have the opposite effect as traders warned of ballooning debt to pay for the incentives.

Credit ratings agency Moody's entered the debate overnight with a warning about the debt impact.

Critics added that Kwarteng's measures would benefit the rich far more than the poorest, as millions of Britons suffer from a cost-of-living crisis.

"We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise," the Treasury said following the statement late Tuesday from the International Monetary Fund (IMF).

"We are focused on growing the economy to raise living standards for everyone," it added, blaming sky-high oil, gas and electricity prices on Russia's invasion of Ukraine.

In a highly unusual intervention, the IMF said it was "closely monitoring" developments and urged the government in London to change tack.

"We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

"However, given elevated inflation pressures in many countries... we do not recommend large and untargeted fiscal packages at this juncture." 

The IMF stressed the importance of fiscal policy not working "at cross purposes to monetary policy".

It added that the "UK measures will likely increase inequality".

Many central banks, including the Bank of England, are aggressively hiking interest rates in a bid to cool decades-high inflation. 

Kwarteng has said it will wait until November 23 to outline plans on controlling government debt.

Moody's called Britain's new fiscal policy regime "credit negative", adding that a sustained confidence shock could "permanently" weaken its debt affordability.