Recession is only way to beat inflation: Shock suggestion from economists

Another interest rate rise is expected tomorrow as the central bank battles to bring down soaring living costs.

Treasury insiders said they will back whatever the bank thinks is necessary to curb prices.

Alex Brazier, a former member of the Bank’s financial policy ­committee, said inflation would only fall below the 2 percent target if a recession was forced.

The deputy head of the BlackRock Investment Institute said it has already “hit the brakes” on the economy “pretty hard” by raising interest rates on 13 ­consecutive occasions.

Mr Brazier told Radio 4’s Today programme: “Inflation has become somewhat entrenched and getting it down to its two percent target probably does entail weak growth and higher unemployment.

“Remember we have already had no growth for the last 18 months. But of course it has already raised interest rates. It’s hit the economic brakes quite hard.” Mr Brazier said “the brakes are working” but the Bank has to “take care not to overdo it” in trying to meet its inflation target.

He added: “Getting it to two percent, the Bank’s target, probably does now entail further growth slowdown, recession and higher unemployment.

“The trick for the Bank is to do that in as moderate a way as possible.”

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Latest inflation figures showed a bigger than expected fall but the rate still remains high at 7.9 percent while consumer credit hit a five-year high last month, with borrowing at £1.7billion.

Credit card borrowing remained level in May but personal loans and finance deals increased.

Bank of England economists will be trying to work out if the increase is fuelled by struggles to make ends meet or through ­consumer demand when it decides how high to put up ­interest rates, experts said.

A Treasury source said: “Inflation is the poison within our economy, slowing growth and eating into savings and pay cheques. We support whatever action the Bank deems necessary to control inflation.”

Manufacturing bosses yesterday warned of an industrial recession after the sector suffered its worst slump this year in July.

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A monthly survey of the private sector – the purchasing managers’ index (PMI) – dropped to 45.3 for manufacturing, down from 46.5 in June. Anything below 50 indicates an overall drop in output and the figures suggest the sector is shrinking rapidly.

Fhaheen Khan, senior economist at manufacturers’ group Make UK, said the survey shows “the economy is on the glidepath to anaemic growth with industry now at risk of facing a recession”.

And he added: “It’s clear manufacturers’ expectation of the future is driving reduced activity today, with inflation and higher interest rates resulting in companies engaging defensive manoeuvres by cutting jobs and investment to protect their business.”

Manufacturers blamed a weakening global market, which hit demand. Rob Dobson, director at S&P Global Market Intelligence, which carries out the PMI survey, said: “July saw a deepening of the UK’s manufacturing downturn.

“Output fell at the quickest pace since January, as overstocked clients, rising export losses, higher interest rates and the cost-of-living crisis coalesced to create a worrying intensification of the slump in demand.

“Domestic and export demand are weakening and backlogs of work are declining sharply, all of which likely presages further ­cutbacks to production, ­employment and purchasing in the months ahead.

“The only upside is prices are falling in this environment of sharply deteriorating demand, with cost pressures also helped by further repair to supply chains.

“Supplier performance improved for the sixth successive month, while raw material prices fell for the third month in a row.

“However, while good news for inflation, lower prices are largely a symptom of malaise and hence bode ill for manufacturers’ profits, which may in turn hit investment.”

Meanwhile, the Bank of England announced yesterday that the woman who led its response to the Northern Rock crisis will be its next deputy governor.

Sarah Breeden will be responsible for financial stability when she begins on November 1.

She will have a role in setting the Bank’s base interest rate as a member of the Monetary Policy Committee.

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