Chancellor Backs Interest Rate Hikes Even If They Risk UK Recession

Chancellor of the Exchequer Jeremy Hunt speaking during the British Chambers Commerce Annual Global conference, at the QEII Centre, London, on May 17, 2023. Jordan Pettitt/PA Media

Chancellor Jeremy Hunt has backed further interest rate hikes being used to rein in inflation even if they increase the risk of pushing the UK into recession.

The Bank of England (BoE) has raised rates 12 times in a row to 4.5 percent from 0.1 percent in December 2021.

The Consumer Prices Index (CPI) of inflation fell from 10.1 percent in March to 8.7 percent in April, but has remained higher than economists had predicted.

A general view of the Bank of England, in London, on Nov. 11, 2022. Dan Kitwood/Getty Images

In an interview with Sky News aired on Friday, Hunt insisted that the “only path to sustainable growth” is to bring down the high prices behind the cost-of-living crisis.

Asked if he was comfortable with the central bank taking further action to bring down inflation even if it could precipitate a recession, Hunt said: “Yes, because in the end inflation is a source of instability. If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”

Hunt said he will make sure the government’s fiscal policy is aligned with the monetary policy at the BoE.

He added: “It is not a trade-off between tackling inflation and recession. In the end, the only path to sustainable growth is to bring down inflation.”

Inflation Goal

Prime Minister Rishi Sunak pledged to halve inflation this year, making the promise in January when the figure stood at 10.1 percent.

According to the data released by the Office for National Statistics earlier this week, CPI inflation dropped to 8.7 percent in April.

But it was higher than forecast by economists, who had pencilled in a drop to 8.2 percent in April, and more than the Bank of England had predicted just two weeks ago.

The figures showed food inflation at 19.3 percent, down only slightly from March’s eye-watering 19.6 percent and remaining close to the highest rate for more than 45 years.

Talking at an event hosted by the Wall Street Journal on Wednesday, BoE governor Andrew Bailey welcomed the fact that inflation had dropped below double digits for the first time in eight months.

But he said food price inflation is taking longer than expected to fall.

The bank governor said there is still a chance the UK government will meet its pledge to halve inflation this year.

In its latest economic forecast, the bank thinks CPI will drop to about 5.2 percent, meaning Sunak could only narrowly reach his target.

Further Hikes Not Ruled Out

Jonathan Haskel, a member of BoE’s Monetary Policy Committee (MPC), said on Thursday that the central bank cannot rule out more interest rate increases.

He told an audience in Washington D.C. that the bank might be forced to increase interest rates again in order to bring it back to its 2 percent target.

“As difficult as our current circumstances are, embedded inflation would be worse,” Haskel said.

In a speech at the Peterson Institute for International Economics, he said: “The MPC remains committed to bringing inflation sustainably back to the 2 percent target, and that is what we will do. But to do this, further increases in bank rate cannot be ruled out.”

Haskel suggested that there have been no comparable periods in recent history to understand the path for inflation.

The last time inflation levels were this high was in the 1970s and 1980s, but “a lot has changed in the structure of the economy since then,” he said.

He added, “The period since the Bank of England’s independence in 1997 has not seen a series of shocks like this before.”

PA Media contributed to this report.