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Bank official calls for forceful rate rises as Truss takes power

The election of Liz Truss as Tory leader coincided with data suggesting a recession is imminent and a Bank of England official signaling the need for

Truss undergoes an economic reality check: the pound nears a 37-year low as bank officials call for vigorous rate hikes and new data suggests a recession is imminent

The daunting economic challenges Liz Truss faces as she prepares to take over as Prime Minister were revealed yesterday.

Truss’ election as Tory leader coincided with a senior Bank of England official signaling the need for “rapid and forceful” interest rate hikes amid rampant inflation.

Catherine Mann, a member of the rate setting committee, said more aggressive rate hikes were needed and didn’t rule out a 75 percentage point hike by the Bank of England at the next meeting.

The election of Liz Truss as Tory leader coincided with data suggesting a recession is imminent and a Bank of England official signaling the need for

The election of Liz Truss as Tory leader coincided with data suggesting a recession is imminent and a Bank of England official signaling the need for “quick and forceful” interest rate hikes

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

The Bank of England has responded by raising interest rates and yesterday Mann supported the idea that vigorous monetary tightening was superior to the current phased approach.

She said: “We must act more vigorously now to ensure drift does not become the norm.”

Truss’ victory also came as sterling fell as low as $1.1444 against the dollar, just a fraction above levels seen on March 20, 2020, when fears of Covid-19 lockdowns gripped markets. Before that, the pound had not been weaker against the dollar since 1985.

By the end of yesterday’s session, it had regained some ground and climbed above $1.15, but some analysts have suggested that it could drop to as low as $1.05.

Truss is scheduled to take office later today, at what CBI chief Tony Danker described as an “extraordinarily difficult time for the leadership of the country.”

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Yesterday, a monthly Purchasing Managers’ Index survey suggested business activity fell in August for the first time since lockdowns in February 2021, but individual industry figures showed retail sales were up 1 per cent last month, while new car sales were up 1 per cent .2 percent up.

Keeping pressure on Truss as she seeks potentially costly solutions to the cost of living crisis is a growing headache for the government’s £2.4 trillion debt burden.

Catherine Mann, a member of the rate setting committee, said more aggressive rate hikes were needed and didn't rule out a 75 percentage point hike at the next meeting

Catherine Mann, a member of the rate setting committee, said more aggressive rate hikes were needed and didn’t rule out a 75 percentage point hike at the next meeting

Higher inflation and loss of investor confidence have pushed up the cost of servicing debt.

Deutsche Bank said the risk of a balance of payments crisis “should not be underestimated”. Shreyas Gopal, a German strategist, said that with inflation rising, growth slowing and the possibility of unfunded spending spree and changes to the Bank of England’s inflation targeting mandate, investor confidence cannot be taken for granted.

“If investor confidence continues to erode, this dynamic could become a self-fulfilling balance of payments crisis,” Gopal said.

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

Investec economist Philip Shaw said Truss “will undoubtedly face the toughest inauguration by a prime minister in recent history.”

Business groups have already submitted their wish-lists for help to the incoming Prime Minister as businesses struggle to survive amid soaring energy prices – with VAT cuts, pandemic-style grants and a rollback of social security increases among demands from the UK Chambers of Commerce.

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