Watch ITV News political editor Robert Peston's analysis of what the Bank of England's latest interest rates hike means for the government's fiscal policy
The Bank of England’s expectation that the British economy will be shrinking until the middle of 2024, as the interest rate it sets is on course to rise from 3% today to 4.75% in coming months, means Rishi Sunak and Jeremy Hunt face the two most stressful weeks of their political lives.
Right now they are preparing to announce very contractionary tax rises and public spending cuts in the Autumn Statement of 17 November, to fill a hole in the public finances they estimate at more than £50bn a year.
They are doing this to reassure international investors who - according to the Bank of England - are still charging HM government more to borrow than before Truss’s reckless mini budget, even though Hunt reversed most of her tax cuts.
If Hunt and Sunak don’t meet these investors’ expectations of a tax and spending squeeze on the economy, the risk is another surge in market interest rates, that will hurt all borrowers, i.e. the government and all of us.
But the politics of putting up taxes and cutting public services when the economy is shrinking are dire.
Tory MPs will struggle to explain why their government appears to be reinforcing the recession rather than taking countervailing measures.
To repeat, the reason Hunt and Sunak feels their hands are tied is because they dare not reinforce the idea - promulgated by the actions of Truss and Kwarteng - that the UK has become economically incompetent.
They are forced to err on the side of putting up taxes and cutting public spending more than necessary to limit the risk of stress in financial markets that would make the recession worse than it would otherwise be.
It is a horror show. For the Conservative Party, and the UK.
Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know