There are reasons to be happy in the Bank of England’s latest economic judgment for the UK economy, which was released with the decision to leave interest rates unchanged at 4%.
Inflation, it said, is now at 3.8%, and is expected to fall back to the 2% growth target in August (when its growth is published at 4%).
As inflation falls, economic growth picks up from 1.5% this year to 1.8% in 2028.
In the meantime, the members of the Central Bank’s Monetary Policy Committee (MPC), signed that the rates will fall from 20% of the hours released at the age of 328.
The next interest rate cut could come in December, which will provide some Christmas cheer for lenders and come sooner than previously expected in finance.
Given the expected slide in inflation and a weak job market, it may be surprising that a cut was ordered this month — and it was a close vote.
The governor of the bank, Andrew Bailey, proved to have the decisive vote, making it five members in favor of keeping rates at 4% and four in favor of a cut to 3.75%.
Bailey’s decision was likely based on three factors. The first is that a rate cut today might be seen as politically helpful for Rachel Reeves in her budget run later this month. Bank officials don’t want to get mixed up in political ding-dings, especially when Nigel Faule questions why the Bank of England needs to be in its current form.
A budget can also change the top of the economy. All the signaling from the Chancellor is that in the short term, the budget will include more burdensome tax increases, which will require consucy teething. But Bailey wants to wait and see how the mix of budgetary policies, which could be many, will affect the Central Bank’s calculations.
And there’s the Bank of England’s reputation as a bulwark against inflation – no ifs, no buts. Bailey takes this reputation seriously. In the current climate, the governor may feel that the bank should be considered tougher on inflation. After all, we live in a world of populist politicians on both ends of the political spectrum who demand lower interest rates as a quick way to improve their popularity ratings.
The US Federal Reserve is considered by many parts of the financial services industry to have passed Donald Trump by signing a more relaxed attitude towards high and rising inflation. Bailey did not want to follow suit.
Of course, this is all speculation. Bailey’s official statement said he needed to be sure “inflation is on track to return to our 2% target” before voting for another cut.
After the newsletter promotion
But this interpretation of Bailey’s decision this month and likely change of heart in December appears well founded when set against his comments in recent months.
As for Reeves, if he can navigate the budget and after it, the bank’s announcements indicate that there are anxious days ahead.
Next year will flow, with growth slow to 1.2%, but from 2027, there will be a steady progress that should increase some tax cuts that he reduced some reductions reduced some reductions reduced some reductions of the reductions of some half of the parliament.
There’s always a chance this benign outlook could be thrown off course, but the Bank of England’s relegation points to hope for better times ahead.