Truss gets an economic reality check: Pound nears a 37-year low as bank official calls for forceful rate rises and recent 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 necessity for ‘fast and forceful’ rate of interest rises within the face of rampant inflation.
Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and didn’t rule out a 75 percentage-point increase from the Bank of England at the following meeting.
Liz Truss’s election as Tory leader coincided with data suggesting recession is imminent and a Bank of England official signalling the necessity for ‘fast and forceful’ rate of interest 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 brand new 12 months.
The Bank of England has responded by mountaineering rates of interest and yesterday Mann backed the concept forceful monetary tightening is superior to the present gradualist approach.
She said: ‘We want to act more forcefully now to make sure that the drift doesn’t turn out to be the norm.’
Truss’s victory also got here as sterling dipped to as little as $1.1444 against the dollar, only a fraction above the extent 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 somewhat ground by the tip of yesterday’s session, climbing above $1.15 but some analysts have suggested that it could sink to as little as $1.05.
Truss is as a result of 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 primary 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 recent automotive sales edged up by 1.2 per cent.
Piling further pressure on Truss as she looks for potentially costly solutions to the price 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 didn’t rule out a 75 percentage-point increase at the following meeting
Higher inflation and investors losing confidence have combined to make the price of servicing that debt higher.
Deutsche Bank said the chance of a balance of payments crisis ‘mustn’t be underestimated’. Shreyas Gopal, a Deutsche strategist, said that with surging inflation, weakening growth, and the opportunity of an unfunded spending splurge and changes to the Bank of England’s inflation-targeting mandate, investor confidence couldn’t be taken with no consideration.
‘If investor confidence erodes further, this dynamic could turn out to be a self-fulfilling balance of payments crisis,’ Gopal said.
The danger could be that investors would refuse to fund the UK’s deficit – broadly speaking the shortfall between imports and exports of products and services.
Investec economist Philip Shaw said that Truss ‘will undoubtedly face the hardest 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 many asks from the British Chambers of Commerce.