‘Pro-growth’ government has only made a UK recession more likely 

The squeeze on public spending is one reason why Truss can kiss goodbye to hopes that her mix of tax cuts and supply-side reforms will boost growth in the months ahead. A more important factor will be higher interest rates.

Despite yesterday’s U-turn, the damage is done to UK’s credit standing – Owl

Larry Elliott www.theguardian.com (extract)

The day before Kwarteng’s mini-budget, the Bank raised interest rates by half a percentage point to 2.25% – deciding against a bigger increase because it thought the UK was in recession. As it happens, an upward revision to growth in the second quarter means the economy is not actually in recession, but the respite is certain to be brief.

Huw Pill, the Bank’s chief economist, has warned that “significant” increases in interest rates can be expected at the next meeting of the monetary policy committee at its next meeting, and the financial markets currently expect official borrowing costs to keep on rising to 6%.

Make no mistake, if the Bank does push rates anywhere close to 6%, it had better be prepared for a colossal recession. Already last week there were signs of trouble ahead from the mortgage market, where more than a thousand home loan products were pulled by lenders watching what was happening to bond yields and the expected path of official Bank of England rates.

Many home buyers have taken out mortgages at high multiples of their incomes in the belief that permanently low interest rates will make them affordable. That assumption now lies in tatters, and floating rate mortgage holders and those whose fixed-rate terms are coming to an end face huge increases in their monthly payments. The supply of new buyers will quickly dry up. House prices will fall.

The irony is that the first budget of a supposedly pro-growth government has made recession more, not less, likely. The government can introduce supply-side reforms in the months ahead, but if interest rates stay high to placate jittery investors, the trend growth rate will be lower, not higher. Britain’s economic history is scattered with budgets that have quickly unravelled: Kwarteng’s is in a class of its own.

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