Official bank calls for strong interest rate hikes when Truss takes power

The huge economic challenges facing Liz Truss as she prepares to take office as Prime Minister were laid out yesterday.

Truss’ election as Tory leader coincided with a top Bank of England official signaling the need to raise interest rates ‘quickly and aggressively’ amid rampant inflation.

Catherine Mann, a member of the rate-setting committee, said more aggressive rate hikes were needed and did not rule out the Bank of England would raise 75 percentage points at its next meeting.

Liz Truss’ election as Tory leader coincided with data suggesting an impending recession and a Bank of England official signaling the need for ‘fast and strong’ rate hikes

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

The Bank of England has responded by raising interest rates and yesterday Mann supported the idea that aggressive monetary tightening is superior to the current gradualist approach. now.

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

Truss’ victory also came as sterling fell to as low as $1.1444 against the dollar, a fraction of the level seen on March 20, 2020 when markets were fearful. about the Covid-19 lockdown. Before that, the British pound had not been weaker against the dollar since 1985.

It regained a bit of ground late yesterday, climbing above $1.15 but some analysts think it could drop to as low as $1.05.

Truss will take office later today at what CBI boss Tony Danker has described as ‘extremely difficult times to lead the country’.

Yesterday, a monthly purchasing managers index survey showed business activity fell in August for the first time since the shutdown in February 2021 but there was a glimmer of optimism from the Separate industry figures show retail sales up 1% last month while new car sales rose 1.2%.

Adding to the pressure on Truss as she searches for potentially costly solutions to the cost of living crisis is the growing headache of the Government’s £2.4 trillion debt.

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

Higher inflation and a loss of investor confidence have combined to make the cost of that debt higher.

Deutsche Bank said the risk of a balance of payments crisis ‘should not be underestimated’. Shreyas Gopal, a strategist at Deutsche, says that with inflation rising, growth weakening and the possibility of a spending flare up without a source and changes to the Central Bank’s inflation targeting mandate UK, investor confidence cannot be taken for granted.

“If investor confidence is further eroded, the move could turn into a self-fulfilling balance of payments crisis,” Gopal said.

The risk is that investors will refuse to finance the UK’s deficit – broadly speaking, the gap between imports and exports of goods and services.

Investec economist Philip Shaw says Truss is ‘certainly going to face the toughest tray of any new outgoing Prime Minister in recent history’.

Business groups have presented the incoming Prime Minister with a wishlist for help as companies battle to survive amid soaring energy prices – with VAT cuts, pandemic-style subsidies and reversed an increase in national insurance among requests from the British Chamber of Commerce.