UK in recession and further rate hikes on the way, Bank Kwarteng warns | Mini budget 2022

The Bank of England has warned Kwasi Kwarteng that the economy is in recession and will most likely have to push interest rates after the chancellor’s mini-budget for tax cuts on Friday.

On the eve of a major support package from the Chancellor designed to break what he called the “cycle of economic stagnation”, Threadneedle Street said the UK economy was heading for a second consecutive quarter of declining output, with gross domestic income product would shrink 0.1% in the three months to September.

However, with energy and food bills still rising and inflation not expected to peak until October, the Bank of England raised the cost of borrowing for a seventh consecutive meeting of its Monetary Policy Committee (MPC) and made it clear that the plans of the new government were at risk. more interest rate hikes.

The MPC — which raised interest rates by 0.5 percentage points to 2.25% on Thursday — said it would carefully assess the impact of energy price caps and the government’s growth plan ahead of the commission’s next decision in November.

In a letter to the Chancellor explaining why inflation is close to five times the 2% target, Bank Governor Andrew Bailey said: “If the outlook points to more continued inflationary pressures, including from stronger demand, the committee to respond vigorously, if necessary.”

Kwarteng will announce 30 separate measures on Friday — including tax cuts, new investment zones and an acceleration of infrastructure projects — in a bid to boost the economy’s growth rate to its stated target of 2.5% a year.

One of the key 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 into effect on 6 November, three months later. days after the Bank’s next interest rate. decision.

While nearly 28 million people will keep more of their income as a result of the move, the Resolution Foundation think tank said that on average the poorest 10% of households would receive £11.41 in 2022-23, while the richest 10% of the households would receive £. 682.

The mini-budget is expected to include significant further interventions to boost growth after the reversal of the NIC surge and the planned corporate tax hike in April, Treasury sources have confirmed, with a Whitehall source describing the package as “more rabbits than Watership Down”. ”.

Key to the fiscal event are new investment zones for 38 local and mayoral authorities in England – including the West Midlands, Tees Valley, Somerset and Hull – which will undergo sweeping deregulation to free up more land for housing and commercial development, and tax cuts. for companies.

The investment zone plans include a number of controversial measures, such as removing the need for developers to meet affordable housing targets, as first revealed by the GuardianEnvironmental Regulation, which will also be reduced in these zones.

Kwarteng will defend plans to lift the cap on bank bonuses and the ban on fracking, saying the government will be “brave and unabashed in pursuing growth — even if it means making tough decisions.”

He will also announce measures to accelerate the delivery of about 100 major infrastructure projects across the country, which he says have been unnecessarily delayed by bureaucracy.

The chancellor will tell MPs: “Growth is not as high as it should be, which has made it more difficult to pay for public services, forcing taxes to rise. This cycle of stagnation has led to the tax burden expected to reach its highest level since the late 1940s.

“We are determined to break that cycle. We need a new approach for a new era of growth. In this way we ensure higher wages, more opportunities and sufficient income to finance our public services, now and in the future.

“In this way, we will successfully compete with dynamic economies around the world. In this way we will turn the vicious circle of stagnation into a beneficial growth cycle.”

Pat McFadden, the shadow chief of the Treasury, said the amounts were extraordinary without any research into how they would be financed except through loans.

“Their choice to finance all of this by borrowing and not trying to fund even part of it through a windfall for the energy companies making the most of the current crisis increases the risk and leaves UK taxpayers paying more for longer” , he said.

Announcing its latest interest rate decision, the Bank of England said the energy price guarantee, which limits household bills, would mean inflation would peak this fall at just below 11% rather than above 13%. Although the consumer price index fell slightly from 10.1% in July to 9.9% in August, it remains at a level not seen since the early 1980s.

However, Bailey said in his letter to Kwarteng that the government’s support measures threatened to increase upward pressure on the cost of living. “All else equal…this will increase inflationary pressures in the medium term,” Bailey wrote.

After GDP fell 0.1% in the three months to June, the Bank said a further 0.1% decline can now be expected in the third quarter amid a slump in consumer spending and weaker activity. in industry and construction.

It said the drop also reflected a smaller-than-expected recovery from the extra holiday for the Queen’s platinum anniversary, as well as the impact of businesses closing their doors as a sign of respect for the state funeral this week. An economy is technically in recession if it experiences two consecutive quarters of negative growth.

Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said: ”The economic tug-of-war between the Bank of England and the government of Liz Truss has kicked off.

“Team Bailey at the Bank of England wants to squeeze demand out of the economy to stop the price spiral, while Team Truss wants to stimulate it, at the risk of extending the pace of rate hikes.”

Leave a Comment