Jeremy Hunt has said he is comfortable with Britain falling into a recession if it is necessary to defeat inflation, days after the IMF said Britain would avoid a downturn .
The Chancellor said he would back the Bank of England in raising interest rates further, as he insisted that the “only path to sustainable growth” is to bring down the high prices behind the cost of living crisis.
The Bank has been increasing interest rates as a way to tackle inflation, but markets predict they could rise as high as 5.5pc this year from the 4.5pc where they currently stand.
Though down from 10.1pc, inflation remains stubbornly high at 8.7pc , with core inflation at its highest since 1992 and food remaining alarmingly expensive.
Mr Hunt told Sky News that prioritising measures to slow rising prices was necessary even if rate hikes damage the UK’s gross domestic product, or GDP, a measure of the size of the economy.
Asked if he was comfortable with the Bank acting to bring down inflation even if it could precipitate a recession, Mr Hunt said: “Yes, because in the end inflation is a source of instability. If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”
He added: “I have to do something else, which is to make sure the decisions that I take as Chancellor, very difficult decisions to balance the books so that the markets, the world, can see that Britain is a country that pays its way – all these things mean that monetary policy at the Bank of England (and) fiscal policy by the Chancellor are aligned.”
Mr Hunt’s comments were supported by former Chancellor Lord Norman Lamont.
Speaking on Sky News, Lord Lamont said: “I think Jeremy Hunt should be applauded – not criticised, applauded – for taking a view that is in the national interest in the longer term.”
The Conservative peer blamed the Bank of England’s actions for pushing up domestically generated inflation through its reaction to the pandemic.
Lord Lamont said: “I warned some time ago that I thought interest rates were too low. I think many people with hindsight would say that was right and that the Bank of England was rather slow in putting up interest rates.
“They overreacted to Covid, cut interest rates too much, and had quantitative easing – that is injection of money into the economy – on far too large a scale for too long.”
It comes as Rishi Sunak has reportedly made inflation his “top” priority ahead of a potential General Election in the next two years.
Lord Robert Hayward said earlier this week that the Prime Minister would delay the next General Election until October 2024 to give inflation time to fall.
“At the local elections there’s a fair amount of evidence that actually it was the people who’ve just faced interest rate increases on their mortgage who didn’t go out and vote for the Conservatives as they have previously said they would,” Lord Hayward said.
“Those interest rates have to come down,” he added.
The Prime Minister has pledged to halve inflation this year , making the promise in January when the figure stood at 10.1pc.
The Bank’s governor Andrew Bailey said there is still a chance the Government will meet the pledge despite prices continuing to climb.
The International Monetary Fund has also upgraded its growth forecast for the UK economy, backing it to avoid a recession and grow slightly by 0.4pc.
Mr Hunt told Sky: “It is not a trade-off between tackling inflation and recession.
“In the end, the only path to sustainable growth is to bring down inflation.”
Mr Hunt’s comments came after Jonathan Haskel, an external member of the Bank of England’s Monetary Policy Committee, hinted strongly that further interest rate rises would be necessary to get inflation under control.
Speaking in Washington on Thursday, Mr Haskell said: “Further increases in Bank Rate cannot be ruled out.”
“Inflation could persist well beyond the terms of trade shock if dynamics in labour and capital income become embedded,” Mr Haskell warned.
Early signs of loosening in the labour market have not been enough to dispel this risk, he added. “I view it as still very tight in an absolute sense,” Mr Haskell said. The vacancy to unemployment ratio and unit wage growth are both historically high.
The combination of high core inflation and subdued economic activity also point to a deterioration on the supply side of the economy, he added.