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UK in recession and further interest rate hikes probable, Bank warns Kwarteng

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theguardian.com

The Bank of England has warned Kwasi Kwarteng the economy is in recession and it will most probably need to push interest rates higher after Friday’s tax-cutting mini-budget.On the eve of a major package of support from the chancellor designed to break what he called the economy’s “cycle of stagnation”, Threadneedle Street said the UK economy was heading for a second consecutive quarter of falling output, with gross domestic product set to shrink 0.1% in the three months to September.However, with energy and food bills still soaring, and inflation not expected to peak until October, the Bank of England raised the cost of borrowing for a seventh successive meeting of its monetary policy committee (MPC) and made clear the new government’s plans risked triggering more interest rate hikes.The MPC – which put up interest rates by 0.5 percentage points to 2.25% on Thursday – said it would be carefully assessing the impact of the government’s energy price caps and growth plan ahead of the committee’s next decision in November.In a letter to the chancellor explaining why inflation is running at almost five times its 2% target, the Bank’s governor, Andrew Bailey, said: “Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee will respond forcefully, as necessary.”Kwarteng will on Friday announce 30 separate measures – including tax cuts, new investment zones and an acceleration of infrastructure projects – in an effort to raise the economy’s growth rate to his stated target of 2.5% a year.One of the main elements of the package – the £13bn reversal of the increase in national insurance contributions, introduced in April to fund the health and social care levy – will come

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