Bank official calls for forceful rate rises as Truss takes power

Truss gets an economic reality check: Pound nears a 37-year low as bank official calls for forceful rate rises and new data suggests recession is imminent

The mammoth economic challenges facing Liz Truss as she prepares to take over as Prime Minister were laid bare yesterday.

Truss’s election as Tory leader coincided with a top Bank of England official signalling the need for ‘fast and forceful’ interest rate rises in the face of rampant inflation.

Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and did not rule out a 75 percentage-point increase from the Bank of England at the next meeting. 

Liz Truss’s election as Tory leader coincided with data suggesting recession is imminent and a Bank of England official signalling the need for ‘fast and forceful’ interest rate rises

Liz Truss’s election as Tory leader coincided with data suggesting recession is imminent and a Bank of England official signalling the need for ‘fast and forceful’ interest rate rises

Soaring energy bills and food prices, spurred by the war in Ukraine, have pushed inflation into double digits and one forecast suggests it could even top 20 per cent in the new year.

The Bank of England has responded by hiking interest rates and yesterday Mann backed the idea that forceful monetary tightening is superior to the current gradualist approach.

She said: ‘We need to act more forcefully now to ensure that the drift does not become the norm.’ 

Truss’s victory also came as sterling dipped to as low as $1.1444 against the dollar, just a fraction above the level seen on March 20, 2020 when markets were gripped with fear over Covid-19 lockdowns. Before that, the pound had not been weaker against the dollar since 1985.

It had regained a little ground by the end of yesterday’s session, climbing above $1.15 but some analysts have suggested that it could sink to as low as $1.05.

Truss is due to take office later today at what CBI boss Tony Danker described as an ‘extraordinarily difficult time to be leading the country’.

Yesterday a monthly purchasing managers’ index survey suggested that business activity shrank in August for the first time since lockdowns in February 2021 but there was a glimmer of positivity from separate industry figures showing that retail figures ticked 1 per cent higher last month while new car sales edged up by 1.2 per cent.

Piling further pressure on Truss as she looks for potentially costly solutions to the cost of living crisis is a growing headache over the Government’s £2.4 trillion debt pile. 

Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and did not rule out a 75 percentage-point increase at the next meeting

Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and did not rule out a 75 percentage-point increase at the next meeting

Higher inflation and investors losing confidence have combined to make the cost of servicing that debt higher.

Deutsche Bank said the risk of a balance of payments crisis ‘should not be underestimated’. Shreyas Gopal, a Deutsche strategist, said that with surging inflation, weakening growth, and the possibility of an unfunded spending splurge and changes to the Bank of England’s inflation-targeting mandate, investor confidence could not be taken for granted. 

‘If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis,’ Gopal said.

The risk would be that investors would refuse to fund the UK’s deficit – broadly speaking the shortfall between imports and exports of goods and services.

Investec economist Philip Shaw said that Truss ‘will undoubtedly face the toughest in-tray of any incoming Prime Minister in recent history’.

Business groups have already presented the incoming PM with their wish lists for help as firms battle for survival amid surging energy prices – with VAT cuts, pandemic-style grants and a reversal of national insurance hike among the asks from the British Chambers of Commerce.

source: dailymail.co.uk