Former Bank of England boss Lord King says the time for rate hikes is over

Former Bank of England governor Mervyn King claimed yesterday that the time for rapid rate hikes is over as shocking economic data raised fears that Britain is headed for recession.

The data showed that private sector manufacturing contracted this month at its fastest pace since January 2021, when Britain was in lockdown.

It was even worse in the Eurozone, where Germany, the largest economy, has struggled this year and fell even further in August, according to separate data.

The deteriorating UK outlook – which points to GDP contracting by 0.2% in the third quarter – prompted markets to scale back the prospect of further rate hikes beyond next month.

Lord King of Lothbury told a Citywire podcast that central banks had lost control of inflation in recent years because of an “intellectual error” about how easily they could control inflation.

But after years of low interest rates and massive money-printing stimulus, they have now reversed course, and he claimed, “This threatens both recession and a sharp drop in inflation.”

Lord King said there is a “clear risk” of them going too far in the opposite direction and “exaggerating” interest rate hikes.

He added: “I don’t think we should expect a dramatic drop from this point unless we get into a deep recession. But I think now is not the time to keep raising interest rates quickly on the basis that inflation remains high.

“Now we just have to wait for it to come back down.”

The monthly purchasing managers’ index (PMI) for August, from analysts S&P Global, pointed to a much sharper-than-expected decline in UK economic activity.

A reading of 47.9 – with the 50 mark marking the dividing line between growth and contraction – marked the end of six months of expansion.

In the Eurozone, the PMI reading of 47.0 was even worse and the third in a row to indicate that the economy is contracting.

The fall in Britain reflected “sluggish domestic economic conditions and higher borrowing costs,” while the outlook grew gloomier on fears about the impact of higher interest rates on consumer spending, the report said.

The higher interest rates were attributed after new data showed private sector output contracted this month at its fastest pace since January 2021, when Britain was in lockdown.

Chris Williamson, economist at S&P Global, said: “The UK economy has entered a significant downturn. Apart from the months of lockdown, this is one of the strongest contractions since the global financial crisis.”

The gloomy numbers suggest that rapid rate hikes – from 0.1 percent in December 2021 to 5.25 percent today – are taking their toll on the economy.

So far, Britain has proved resilient in the face of cost-of-living pressures faced by households. In doing so, it defies fears that the economy could contract and has prompted the International Monetary Fund to reverse pessimistic forecasts.

After the latest report, markets continue to expect interest rates to rise again, to 5.5 percent next month and to 5.75 percent by the end of the year.

But expectations that interest rates could hit 6 percent have been scaled back – a relief for mortgage borrowers.

Analysts at US investment bank Citi predict that Britain and the US will enter a recession next year.