Today’s intervention in the gilts market by the Bank of England is a strong indication that it will not hike the bank rate all the way to 6%.
So says Samuel Tombs, chief UK economist at Pantheon Macroeconomics pointing out that rates at that level would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability.
As a result sterling is likely to come under further pressure with Tombs forecasting that even a rise interest rates to 4% would be enough to lead to a big enough rise in interest payments and reduction in new borrowing to generate a recession, which will crush domestically-generated inflation.
He said he now expects sterling to take the brunt of any further deterioration in overseas’ investors willingness to lend to the UK and that the Monetary Policy Committee will reluctantly let it slide.
“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in the foreign exchange and gilt markets, but its actions to date have eroded confidence among global investors, which cannot be easily restored.” Tombs said, adding ominously that “a painful recession driven by surging borrowing costs lies ahead.”