LONDON, Sept 15 (Reuters) – The Bank of England and Britain’s new finance minister Kwasi Kwarteng will test their ability to jointly manage the economy next week, with the BoE set to raise interest rates to fight inflation and Kwarteng eyeing tax cuts which could stoke prices.
The seemingly opposing directions of monetary and fiscal policy underscore the economic challenges for Britain, which has the highest inflation rate among the world’s big rich countries but is also at risk of slipping into a recession.
New Prime Minister Liz Truss campaigned for the Conservative Party leadership with a vow to reverse the “Treasury orthodoxy” which she blames for higher taxes and slower economic growth.
Now she and Kwarteng will have to find a way to deliver on those promises without pushing the BoE to raise interest rates so much that it worsens the economic slowdown.
On moving into Downing Street, Truss also announced a cap on energy prices that will help cushion the impact of soaring bills for households but will cost 100 billion pounds ($115 billion) – and possibly more – at a time when Britain’s public finances are already stretched.
The cap means that inflation, which hit a 40-year high of 10.1% in July before edging down in August, will peak lower than it would have otherwise done, but the injection of money into consumers pockets is likely to keep it high for longer.