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Kwarteng warns Bank of England to get grip on inflation

·5-min read
Kwasi Kwarteng
Kwasi Kwarteng

Kwasi Kwarteng has issued a warning to the Governor of the Bank of England, as he vows in Friday's mini-Budget to break the “cycle of stagnation”.

The Chancellor told Andrew Bailey that claims that near double-digit inflation was mainly driven by the war in Ukraine were less credible now that the Government had taken action to hold down energy bills, a swipe at the Bank's record on controlling inflation.

In a letter to Mr Bailey that marked a change in tone compared with Rishi Sunak, Mr Kwarteng said: "Current high inflation is making it hard for households to pay their energy bills and meet their other living costs, whilst placing further costs on businesses and reducing the certainty they need to grow.

"Inflationary pressures are becoming more domestically driven".

He stressed it was the Bank's job to ensure inflation, which currently stands at 9.9pc, returns back to its 2pc target.

"I know and expect that the MPC will continue to take the forceful action necessary to achieve this," he said.

It came as policymakers at the Bank of England warned Britain was already in recession as they raised interest rates by 0.5 percentage points, surprising money markets that had expected a more radical 0.75 point rise.

In a further sign of tensions between the new Government and the Bank, a Downing Street spokesman cast doubt on claims a recession is already underway, saying that forecasts can "fluctuate and change".

Mr Kwarteng's "unashamedly pro-growth" stance has led to speculation of big tax cuts in Friday's mini-Budget.

The close ally of Liz Truss has shaken up the Treasury since taking charge this month, including by ousting its long-serving permanent secretary Sir Tom Scholar.

Economists at the Institute for Fiscal Studies said Friday's announcements were likely to amount to "the biggest tax-cutting fiscal event since Nigel Lawson’s budget of 1988."

The Chancellor confirmed he was cancelling the 1.25-percentage point increase in national insurance (NI) imposed by Mr Sunak, to pay for social care and dealing with the NHS backlog.

As well as cancelling the NI increase from November, saving the average worker £330 next year, the Chancellor will also announce a bonfire of red tape designed to speed up infrastructure projects and establish new low-tax investment zones to drive economic growth.

Mr Kwarteng will announce two “rabbits out the hat” that have not previously been reported. Several policy measures that had originally been planned for the Autumn Budget have also been brought forward to be included in Friday’s statement instead.

On Thursday night there was speculation that VAT and bigger tax breaks for business investment could form part of the package.

Mr Kwarteng will say: “Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.

“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s. We are determined to break that cycle. We need a new approach for a new era focused on growth.

“That is how we will deliver higher wages, greater opportunities and sufficient revenue to fund our public services, now and into the future."

A Treasury source blamed "economic orthodoxy" for the cycle of stagnation.

"For too long we have focused on how to split up the size of the pie rather than how to grow the pie," the source said.
Mr Kwarteng has previously criticised the Bank for failing to get a grip on inflation, declaring that "something's gone wrong" at the institution.

Insiders said the relationship between the governor and chancellor remained cordial, including at bi-weekly meetings between the pair.

Mr Kwarteng added that the government's commitment to the Bank's independence remained "absolute".

The Chancellor is also expected to set out a timetable for the government's independent forecaster to publish its assessment of the government's tax and spending policies. Mr Kwarteng insisted he remained "committed to two forecasts in this fiscal year, as required by legislation".

The Office for Budget Responsibility will not provide an economic forecast alongside Friday's mini-Budget. It came as policymakers at the Bank of England warned Britain was already in recession as they raised interest rates by 0.5 percentage points for the second time in a row at their regular meeting.

The central bank lifted rates to 2.25pc as policymakers said the UK economy suffered from weak economic activity in the three months to September.

Official data show the economy shrank 0.1pc in the three months to June. Bank policymakers now believe the economy continued to shrink by 0.1pc in the quarter to September, which would push the UK into the mildest of technical recessions defined as two straight quarters of economic decline.

Markets had been expecting a 0.75 percentage point increase and reacted to the Bank announcement by sending the pound sharply lower against the dollar.

The Bank said the Prime Minister's move to cap average annual energy costs at £2,500 over the next two years meant inflation will now peak just below 11pc in October, down from a previous prediction of 13.3pc.

A Downing Street spokesman said: "The UK is not alone in facing slow growth. It's not unusual for forecasts to fluctuate and change as further interventions are made. And that is why we are supporting households and businesses with high energy bills."