Hike rates

UK should abandon tax cuts, raise rates and accept deeper recession to avoid higher inflation, says Mohamed El-Erian

  • The UK must abandon its plan to cut taxes and raise interest rates immediately, said Mohamed El-Erian.
  • Although aggressive rate hikes could trigger a recession, the UK is past the point of hoping for a soft landing, he warned.

The UK must abandon its plan to cut taxes and instead raise interest rates, according to leading economist Mohamed El-Erian, who added that the country must accept a deeper recession to avoid skyrocketing inflation.

El-Erian strongly criticized the UK’s proposed mini-budget, which will involve increases in public spending while cutting taxes on the wealthy. Fears of worsening inflation and unsustainable deficits sent the pound to a record high against the dollar on Monday, prompting the Bank of England to start redeem bonds on Wednesday to stabilize debt markets.

While the central bank avoided an immediate financial crisis with its intervention, it is the opposite of what it should be doing to reduce inflation, El-Erian warned. He urged the nation to reject his tax cut plan and increase rates by 100 basis points.

“It would be a tragedy if it resulted in new [tax] cuts. What we need is the tax cuts removed, we need the Bank of England to act on interest rates,” El-Erian said in an interview with BBC Wednesday.

“Without [tax cuts]I would look to the Bank of England for incredible interest rate hikes and accept a much deeper recession,” he added.

El-Erian previously said the turmoil in UK markets was a sign of a paradigm shift in the global economy as central banks shift from quantitative easing to quantitative tightening to fight inflation. He criticized central banks around the world for not acting soon enough on rising inflationforcing them to raise rates too aggressively afterwards.

“We are now immersed in the world of the third and fourth best. There is no action that does not have collateral damage. The least bad action at the moment is not to go ahead with the tax cuts,” he warned. .