Former Bank of England governor Lord King says the time for interest rates hikes is over as shock figures raise fears the UK is heading for a recession

• Lord King said there’s a ‘clear risk’ that central banks ‘overdo’ interest rate hikes 
• The ex-Bank of England governor said we now must ‘wait’ for inflation to fall 

Former Bank of England governor Mervyn King claimed yesterday the time for rapid interest rate increases is over as shock economic figures raised fears that Britain is heading for recession.

The data showed private sector output shrank this month at the fastest pace since January 2021 when Britain was in lockdown.

It was even worse in the eurozone, whose biggest economy Germany has been struggling badly this year and took a further dive in August according to separate figures.

The deteriorating UK outlook – suggesting GDP may have shrunk by 0.2 per cent in the third quarter – prompted markets to scale back the prospect of further interest rises beyond next month. 

Lord King of Lothbury told a Citywire podcast that central banks had lost control of inflation over the past couple of years because of an ‘intellectual mistake’ about how easily they could keep a lid on it.

But after years of low interest rates and vast money printing stimulus policies, they have now reversed course and he claimed: ‘This does threaten both recession and a sharp fall in inflation.’

Lord King said there was a ‘clear risk’ that they may go too far in the other direction and ‘overdo’ rate hikes.

He added: ‘I don’t think we should expect to see dramatic falls from this point unless we get ourselves into a deep recession. But I think this is not the moment to be going on raising interest rates rapidly on the basis that inflation remains high.

‘We just have to wait now to let it come back down.’

The monthly purchasing managers’ index (PMI) for August, from analysts S&P Global, pointed to a much sharper than expected decline in UK economic activity.

A reading of 47.9 – where the 50-mark separates growth from contraction – signalled an end to six months of expansion.

In the eurozone, the PMI reading of 47.0 was even worse and the third in a row to point to the economy shrinking.

The UK’s slide reflected ‘sluggish domestic economic conditions and higher borrowing costs’ while the outlook darkened amid fears for the impact of higher interest rates on consumer spending, the report said.

Chris Williamson, economist at S&P Global, said: ‘The UK economy has entered a significant downturn. Barring lockdown months, this is one of the steepest contractions since the global financial crisis.’

The dire figures suggest that rapid hikes in interest rates – up from 0.1 per cent in December 2021 to 5.25 per cent today – are taking their toll on the economy. 

Until now, UK has proved resilient in the face of the cost-of-living squeeze facing households, defying fears that the economy could shrink and prompting the International Monetary Fund to reverse pessimistic forecasts.

Following the latest report, markets continue to expect interest rates will rise again, to 5.5 per cent next month and to 5.75 per cent by the end of the year.

But expectations that interest rates could hit 6 per cent have been scaled back – a relief for mortgage borrowers.

Analysts at US investment bank Citi have predicted the UK and US will fall into recession next year.