Interest rates in the UK will hit 4 per cent in August 2023 if Liz Truss's government cuts tax and increases spending on defence, Bank of America has warned.
In a research note released this week (September 13), the bank’s research team said they expect the Bank of England to raise the base rate of interest by 50 basis points at its rate setting meeting next week, and to do the same monthly until December this year.
“By lowering peak inflation we see the government's energy price cap allowing the BoE to avoid increasing the pace of hikes,” the note said.
The UK has seen prices rise since May last year, with inflation hitting 9.9 per cent in the 12 months to August this year, according to the Office for National Statistics.
But, it added, more fiscal stimulus means the BoE will have to hike more overall.
“Looser fiscal [policy] means tighter monetary [policy].”
The research team has predicted the central bank will therefore hike interest rates by 25 basis points in February, May and August next year, taking the rate to 4 per cent.
This is an upgrade to the 3.25 per cent Bank of America expected previously.
In the note, the research team said this increase is a direct result of the major tax cuts and defence spending increases, in addition to the energy price cap, that it expects Liz Truss’s government to embark on.
This will raise annual government borrowing by between £40bn and £50bn by 2026 and 2027, it said.
Liz Truss promised around £30bn in tax cuts annually as part of her campaign to become the next prime minister.
In contrast to her main competitor, Rishi Sunak, who said he would get inflation under control before he looked at cutting taxes, Truss pledged to cancel a planned rise in corporation tax, abolish the social care levy, and scrap the green levy on energy bills.
This led to calls of fiscal irresponsibility from the camps of her competitors for the leadership.
sally.hickey@ft.com
