UK in recession and further interest rate hikes probable, Bank warns Kwarteng
The Bank of England has warned Kwasi Kwarteng the economy is in recession and it will most probably need to push interest rates higher after Friday’s tax-cutting mini-budget.
On the eve of a major package of support from the chancellor designed to break what he called the economy’s “cycle of stagnation”, Threadneedle Street said the UK economy was heading for a second consecutive quarter of falling output, with gross domestic product set to shrink 0.1% in the three months to September.
However, with energy and food bills still soaring, and inflation not expected to peak until October, the Bank of England raised the cost of borrowing for a seventh successive meeting of its monetary policy committee (MPC) and made clear the new government’s plans risked triggering more interest rate hikes.
The MPC – which put up interest rates by 0.5 percentage points to 2.25% on Thursday – said it would be carefully assessing the impact of the government’s energy price caps and growth plan ahead of the committee’s next decision in November.
In a letter to the chancellor explaining why inflation is running at almost five times its 2% target, the Bank’s governor, Andrew Bailey, said: “Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee will respond forcefully, as necessary.”
Kwarteng will on Friday announce 30 separate measures – including tax cuts, new investment zones and an acceleration of infrastructure projects – in an effort to raise the economy’s growth rate to his stated target of 2.5% a year.
One of the main elements of the package – the £13bn reversal of the increase in national insurance contributions, introduced in April to fund the health and social care levy – will come
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