The Daily Telegraph

UK faces growing risk of 1970s-style payment crisis, warns Deutsche

- By Tim Wallace and Szu Ping Chan

‘If confidence erodes further, this could become a self-fulfilling balance of payments crisis’

‘There is a risk of recession, a worsening labour market and elevated price pressures’

THE UK risks a 1970s-style currency crisis if Liz Truss unleashes a series of unfunded and poorly targeted tax cuts, Deutsche Bank has warned, as a senior Bank of England policymake­r suggested the central bank should consider the biggest rate hike since Black Wednesday.

The investment bank said the incoming prime minister’s plans for aggressive government spending combined with the “severe energy shock” also risked a “vicious cycle” of higher interest rates and inflation. Deutsche Bank said blanket tax cuts – like a big cut in VAT – that went beyond “well targeted” support for households struggling with energy bills could lead to more investors selling UK government bonds.

Shreyas Gopal, strategist at the bank, said: “If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners would refuse to fund the UK external deficit.”

Credit Suisse also warned that shifting economic policies including heavy borrowing, surging interest rates and any surprises around the Brexit deal could shake financial markets. The warnings came as sterling dropped to $1.14 against the dollar, within a whisker of its March 2020 low when the pandemic struck, while the Government’s 10-year borrowing costs briefly approached 3pc, an interest rate that has not been seen since 2013.

It came as Catherine Mann, a member of the Bank of England’s Monetary Policy Committee, said more “forceful” action was needed to ward off a 1970s-style unemployme­nt crisis. Failing to get a grip now risks a longer recession later, Ms Mann said, invoking the battles of the 1980s when central bankers struggled to get prices under control. The Bank has raised rates six times from 0.1pc in December to 1.75pc now. Ms Mann said the possibilit­y of a 0.75 percentage point rise in rates – which would be the biggest jump since Black Wednesday in 1992 – will be “an important question”.

Britain already faces recession as energy prices hammer factories and rising costs push households to cut back on restaurant­s and hotels. Businesses reported a fall in activity in August for the first time since the 2021 lockdown, in S&P Global’s monthly purchasing managers’ index survey. The index fell to 49.6, dropping below the 50-mark to indicate contractio­n.

Chris Williamson, of S&P Global Market Intelligen­ce, said: “The incoming prime minister will be dealing with an economy that is facing a heightened risk of recession, a deteriorat­ing labour market and persistent elevated price pressures linked to the cost of energy.”

The eurozone is struggling even more. Its PMI fell to 48.9, the sharpest fall in business output for 18 months.

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