Bank of England: UK might be in recession

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The so-called emergency tax-cutting mini-budget is expected to be unveiled on Friday by the UK Chancellor of the Exchequer, Kwasi Kwarteng, outlining the main economic strategies that new Prime Minister Liz Truss's government is banking on to help businesses and individuals cope with the acute cost of living.

Andrew Bailey, the governor of the Bank of England (BoE), warned Chancellor Kwarteng ahead of Friday’s fiscal event, saying the UK economy may already be in recession and noting that the interest rates may hike even further after the tax-cutting mini-budget is revealed, according to UK media outlets.

Read: Inflation fever: UK's highest in 40 years, recession unavoidable

While interest rates were raised by 0.5 percentage points on September 22, Kwarteng is expected to unveil the government's plan on measures that should be taken to help businesses and households deal with the cost of living crisis.

The BoE also predicted the GDP to contract by 0.1% in the third quarter amid a plunge in consumer spending and slower activity in the construction and manufacturing sectors.

Furthermore, the BoE’s monetary policy committee (MPC) emphasized during its meeting that Truss’s economic strategies were full of additional inflationary pressures.

The MPC would be evaluating the impact of the government’s plan, presupposing the introduction of energy price caps and tax cuts, ahead of the committee’s coming borrowing decision in November, according to Bailey.

“All else equal ... this will add to inflationary pressures in the medium term,” Bailey warned Kwarteng about the household energy cap.

“Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee will respond forcefully, as necessary,” he wrote to Kwarteng in the scheduled letter.

Along with the ongoing volatility in wholesale gas prices, there had been indications since August of “continuing strength in domestically generated inflation,” the BoE said in its release on Thursday.

The consumer prices index would peak at just below 11% this autumn rather than exceed 13%, as per the BoE; however, it added in its release:

“The labour market is tight and domestic cost and price pressures remain elevated. While the [energy bill subsidy] reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period.”

This comes as Kwarteng is expected to reveal the government’s major package of support planned to break the economy’s “cycle of stagnation” through infrastructure reforms and tax cuts.

Read more: UK likely heading towards a year-long recession

Kwarteng will reveal over 30 measures as part of the Treasury’s “Growth Plan” in a speech at the House of Commons, including relief for households to tackle high energy bills.

He will also announce an estimated £30 billion ($33.5 billion) worth of tax cuts, such as reversing the national insurance increase, scrapping the planned rise in corporation tax from 19% to 25%, and removing environmental charges added to energy bills. 

Other announcements will include new investment zones in England that will offer “targeted” tax cuts for local businesses, allowing firms to create new jobs and “increase productivity”. Some 100 new infrastructure projects are also to be accelerated across energy, transport, and the digital sphere to achieve a targeted economic growth rate of 2.5 percent a year.

“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,” the chancellor is expected to announce, as per UK media reports.