The UK economy is once again under a microscope with a new prime minister in office and a tumbling currency.
Much like its neighbor across the Atlantic, the UK is currently grappling with record inflation and soaring energy prices. In response, the Bank of England (BoE) opted for another interest rate hike of 50ps for the second straight month and the administration of Prime Minister Liz Truss enacted the biggest tax cuts in 50 years.
“The Bank of England is going to raise rates quite clearly in the depths of a recession, and it appears to be making exactly the same mistakes as they made in 2008,” David Blanchflower, professor of economics at Dartmouth College, told Yahoo Finance Live (video above). "You should be cutting rates, not raising them. And the only issue is going to be how quick it is before they have to start cutting."
UK interest rates are now at 2.25%, its highest level since 2008, as the BoE deemed that inflation pressures outweighed the short-term risk of a recession. Meanwhile, the British pound has neared parity with the U.S. dollar at $1.12 USD, as of Sep. 23.
Blanchflower stated that the economic plan that the BoE has in place "looks completely and utterly out of touch with the reality, which is that ordinary people are confronted with really high bills that they're going to have to pay. And I don't really see anything that's going to confront that."
Between the lack of confidence in both the markets and the economic policies of both the UK government and Bank of England, Blanchflower added, "the British economy is in disarray."
Winter is coming — with an energy crisis
On top of general inflation, Europe is currently facing an unprecedented energy crisis, which has resulted in record-high gas bills for millions of households across the continent.
The annual energy price cap by October could reach up to $3,996 (£3,500) per UK household. By next year, households could pay as high as 500% more than before the pandemic. (In comparison, the average U.S. household pays $2,060 (£2,352) in utility bills.)
The higher energy prices are largely due to the ongoing Russian-Ukraine War. Due to the West's support for Ukraine, Russia has repeatedly shut down the Nord Stream 1 pipeline, a critical pipeline that sends gas to Europe, though the country has denied using energy as a political weapon.
According to the International Monetary Fund (IMF), Europe's energy crisis is hitting UK households the hardest, mainly due to the fact that the nation is heavily reliant on gas for heat and is also the least energy efficient in Western Europe. Additionally, the IMF analysis found, "the difference between the cost burden on poor and rich households is also far more unequal in the UK compared with other countries."
Blanchflower stated that BoE's policy decisions won't do anything to help these households in the short term.
"If you start to talk about tax cuts and corporation tax cuts and changing the remit of the Bank of England, that may be fine," Blanchflower said. "But that's not going to have any effect this winter ... We're in deep crisis for the winter. It's going to be a winter of considerable discontent."
He isn't the only one warning about the next few months for UK households — Philippe Commaret, head of EDF Energy's retail business, told BBC Radio that the nation faces a "dramatic and catastrophic winter for customers" and called for extra government intervention.
To tackle the high bills, the government introduced a legislation allowing landlords to provide renters with a $456 (£400) discount October onwards, but eligibility for the discount depends on how renters pay their bills.
“The big story is a complete collapse in consumer confidence,” Blanchflower said. “Consumer confidence predicts pretty well what’s coming. The consumer confidence in the UK now is below what it was in 2007 and 2008.”
Tanya is a data reporter for Yahoo Finance. Follow her on Twitter.