Interest rates could ‘easily choke life out of economy’

John Redwood says cutting taxes will 'stave off' a recession

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Experts have warned of a nightmare recession as the interest rate hike could “easily choke the life out of the economy”. The Bank of England’s (BoE) Monetary Policy Committee (MPC) voted to increase the key base rate by 0.5 percentage points to 2.25 percent, its highest level since 2008.

Charlie Huggins, Head of Equities at Wealth Club, told the increase will “pile further pressure on consumers and businesses, at a time when many are already being strangled by the cost-of-living crisis”.

He said: “The Monetary Policy Committee will feel its hand was forced. The new Tory government is opening the fiscal taps, while on the other side of the pond, the Federal Reserve is tightening the monetary screws. 

“Both factors have compounded pressure on sterling, which is trading at its weakest level against the dollar since 1985. 

“A weak currency only fans the flames of inflation, given the UK’s reliance on imports.”

Mr Huggins added that “the Bank of England is stuck between a rock and a hard place” in regards on how they can manage the economy.

He told “A gentler approach to rate rises risks sending sterling into a tailspin, and seeing inflation get even further out of control. 

“But too much tightening could easily choke the life out of the economy, without significantly easing the cost-of-living crisis. 

“It’s a horrible balancing act, with seemingly no good outcomes.”

Data from the BoE showed the UK’s economy is already in recession after gross domestic product (GDP) shrank for the second straight quarter.

Official figures from the Office for National Statistics show the economy shrank 0.1 percent in the three months to June, and has continued to contract.

Members of the MPC now believe the economy continued to shrink by 0.1 percent in the quarter to September, marking two consecutive contractions which meets the generally accepted definition of a recession.

Three members of the MPC voted for an increase of 0.75 percentage points, five backed a half-point rise and one pushed for a more limited quarter-point move.


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In committee minutes, the MPC said the “tight labour with wage growth and domestic inflation” above targets called for a “forceful response”.

Business secretary Jacob Rees-Mogg announced on Wednesday the Government will slash business energy bills in half, in a bid to prevent firms collapsing over the winter period.

Chancellor Kwasi Kwarteng will also deliver a mini-Budget on Friday, setting out details of help for households and businesses amid the cost of living crisis.

Mr Kwarteng confirmed ahead of his budget that the National Insurance increase brought in by Boris Johnson’s Government in April will be reversed in November.

The Treasury said the axing of the increase on November 6 would cut the tax bill of almost a million firms by an average of £10,000. 

Mr Kwarteng is also set to scrap the scheduled increase in corporation tax, reduce stamp duty, axe the cap on City bonuses and create low-tax Investment Zones.

Marc von Grundherr, Director of Benham and Reeves, also told the interest rate rise will have a cooling effect on potential first time buyers.

He said: “Not only has the cost of running our homes increased dramatically in recent months, but the temptation to over borrow while rates were low is now coming back to haunt many homeowners. 

“Those who purchased a property during the pandemic market boom and have come to the end of their fixed mortgage term, as well as those on a variable rate mortgage, are now being hit with both barrels as the monthly cost of their mortgage climbed considerably. 

“However, while this is sure to add a degree of caution going forward, it’s unlikely to dampen the appetite of the nation’s aspirational homebuyers, which will ensure that the property market remains resolute despite the wider economic landscape.”

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