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Treacherous path ahead for Bank of England and markets

Either interest rates will have to rise to levels that will crush demand or sterling risks falling further, adding to inflation
The writer is an economist and the author of ‘Two Hundred Years of Muddling Through: The Surprising Story of Britain’s Economy from Boom to Bust and Back Again’

After 12 years of fiscal conservatism being the lodestar of British economic policy, the sudden switch to a tax-cutting, supposedly pro-growth agenda has clearly rattled investors.

To say that Friday’s “mini-Budget” went down badly with financial markets would be an understatement. UK government debt underwent its largest two day sell-off on record while sterling fell to a new historical low against the dollar. It is tough to find historical precedents for these sorts of market moves in British economic history.

Rarely has opinion on quite what the UK government’s abrupt shift means been so divided. On the one extreme, the unusual combination of a falling currency and rising interest rates has led some commentators to suggest that the UK is behaving like an emerging market. On the other, some of the government’s backers have welcomed sharp rises in interest rates as part of a deliberate shift to a combination of looser fiscal and tighter monetary policy.

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