GDP fell by 0.1 per cent according to the ONS (Image: Getty)
Britain's economy will get a vital kick-start if the Bank of England slashes interest rates early next year, senior Tories have urged.
The demand for the Bank’s rate setters to take action is part of a growing call to bring in immediate cuts to rates to avoid a damamging recession.
The rallying cry comes as a major new report today warns that high interest rates have made Britain’s economic output “weaker” and driven down house prices. Experts at the widely respected Centre for Economics and Business Research (CEBR) said the approach had also stifled investment in the UK.
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Former Cabinet Minister John Redwood blamed the Bank’s policy for the UK’s economic woes and called for rates to be cut in January.
“The Bank has a broken model which has been so wrong on inflation,” he said. “This has led them to lurch from far too easy to too tight on money and interest rates.
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“Their current policy threatens us with an unwanted recession after avoidable high inflation.”
Fellow Conservative MP Jake Berry has previously accused the Bank of being “asleep at the wheel” for not putting interest rates up quickly enough to tackle soaring inflation.
“I hope they don’t make the same mistake of inaction by not bringing them down,” he said.
The base interest rate has been pegged at 5.25% for the past three months with the Bank warning it won’t come down until the middle of 2024 as the battle against inflation continues.
But calls for the BoE to wield the axe much sooner intensified after the rate of inflation unexpectedly plunged to 3.9% last month - the lowest in more than two years.
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There are concerns the fiscal tightening has had a negative impact on economic growth with
official figures showing the economy shrank between July and September.
Gross domestic product (GDP) fell by 0.1% according to the Office for National Statistics (ONS), raising the risk of the country dipping into a recession.
Last week Mel Stride, the Work and Pensions Secretary, suggested interest rates should come down sooner than the Bank is planning.
“A greater decrease in inflation of course means that monetary policy might be loosened a little bit more quickly than it would otherwise be – in other words, interest rates coming down,” he said.
The CEBR study warns that higher interest rates are stifling the economy.
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It notes that the Bank of England’s base rate has been hiked from a record low of 0.1% to 5.25% in the space of two years.
“By making borrowing more expensive, this tighter interest rate environment is discouraging investment and spending, thereby contributing to weaker output,” it says.
“Higher interest rates are also expected to have other effects on the UK economy, notably in the housing market, where prices have started to show annual declines in recent months.
“Nevertheless, the tighter policy environment is having a tangible impact on inflation, with price growth expected to slow further into 2024 and beyond.”
Chancellor Jeremy Hunt said: “Those who talk down the UK are wrong. We have grown faster than any other major European economy since 2010 and the CEBR forecast us to grow faster than France and Germany in the longer term.
“By betting on Britain with tax cuts for hard working people and businesses who invest, we are making sure Britain is the best place to start and grow a business.”
The Bank is legally mandated to target an inflation rate of two per cent, around half of the current level, although it will also be keen to avoid tipping the UK into recession.
Its governor Andrew Bailey has indicated that any cuts are unlikely before next summer.
But high interest rates have pummelled mortgage-holders - adding hundreds of pounds to monthly payments.
Millions more people are facing higher mortgage costs in 2024, with more than one in five fixed-rate deals coming up for renewal next year.
Financial Conduct Authority (FCA) figures show at least 1.54 million fixed-rate mortgage deals will expire in 2024, leading to concern that the impact of high interest rates has not yet been felt.
Despite the gloomy short-term economic outlook the long-term picture appears rosier, according to the CEBR, with Britain’s economy set to surge way ahead of France within the next 15 years.
The UK will also continue to close the gap on Germany by the 2030s.
The findings, which again prove the Brexit naysayers wrong, come in the business think-tank’s annual World Economic League Table (WELT), which examines the growth prospects of 193 countries.
In a huge embarrassment to French President Emmanuel Macron, the research predicts the British economy will be 20 per cent bigger than that of rivals France by 2038.
It estimates that the UK economy, worth around ￡2.4 trillion, is already 10.2 per cent bigger than France’s.
This is forecast to increase to 19.9 per cent in 15 years time, the report said.
In that same period, the gap between the UK and Germany - which is 32.5 per cent larger than the UK - is expected to narrow to 28.8 per cent.
This year’s world economic league table estimates the UK has the world’s sixth-largest economy.
Britain was overtaken for the first time by the rising economic superpower India.
A mega trade deal between the UK and India is expected shortly.
Britain will also reap the benefits of joining the passive Indo-Pacific trading bloc - the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) - during the coming decade.
The USA remains number one in the 2023 WELT as China’s economic growth continues to be falter following the pandemic.
But the Communist giant is expected to have the world’s largest economy by 2038, with India moving into third place, according to the CEBR.
Russia’s economy, eighth in 2022, has fallen three places this year in the aftermath of sanctions following its Ukrainian invasion.
It is expected to plunge to 14th by 2038.
Sam Miley, Cebr Managing Economist and Forecasting Lead, said: “China’s economy has faced several years of instability, driven by the Covid-19 pandemic and the domestic property market. The future prospects of the economy remain strong, however, and we expect China to overtake the US as the world’s largest economy within 15 years.
“Beyond this, there could be more of a tussle between these two superpowers, as China’s demographic shift is likely to open the door for the US to retake the number one spot. Despite the projected convergence in absolute terms, a Chinese economy with US levels of GDP per capita lies firmly beyond the current forecast horizon.”
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Pushpin Singh, Cebr Senior Economist, said: “In light of recent revisions, India overtook the UK to cement its status as the 5th largest economy in 2022. Bolstered by robust demographic trends and a diverse economic foundation, India’s upward trajectory is poised to persist.
“Projections indicate that by 2032, it is on track to become the third-largest economy; by 2035, the world’s third $10 trillion economy; and by the late 21st century, a strong contender to emerge as the world’s largest economy, reinforcing its position on the global economic stage now and in the future.”
Comment by Michael Knowles - Political Commentator
Knowles: "Talk of more tax cuts in the new year will help" (Image: IMDB)
The key to Rishi Sunak’s chances of a second term in Downing Street is people feeling better off.
The prospect of interest rates falling over the coming year was a welcome Christmas present for many homeowners.
It will hopefully lead to lower mortgage bills and ease the cost of living crisis so many have been enduring. This will, of course, apply to both homeowners and renters who have faced skyrocketing rents over the past few months.
For Mr Sunak to secure victory in next year’s General Election, many families will need to feel like they are thriving – not just surviving.
Talk of more tax cuts in the new year will help. The historically high tax burden has to fall if the Prime Minister wants to continue in Downing Street.
Because, let’s be honest, sky-high taxes are not leading to the quality of public services you would expect.
So Mr Sunak needs to put Britain on a path to growth, with lower taxes and confidence that the pain from the last couple of years is over. Growth will pay for better public services and allow more taxes to be cut.
Downing Street is said to have considered cuts to income tax, inheritance tax and stamp duty in different versions of pre-election giveaways.
These would all be welcome boosts for a nation weary from years of what the Treasury describes as “economic shocks”.
The Prime Minister has indicated he wants to move away from the high spending, high borrowing, and high tax approach that was necessary” during the Coronavirus pandemic and the energy crisis.
Ensuring this leads to the nation having more money to spend on their loved ones will be critical to Mr Sunak’s electoral chances.
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