A reduction in interest rates by the Bank of England should rank as a joyful summer gift to borrowers weighed down by the high cost of mortgages and loans.
Yet the latest quarter-point cut to the cost of borrowing, from 4.25% to 4%, is laced with so many warnings that any celebration will be muted.
Most prominently, the Bank’s monetary policy committee (MPC) said in its latest assessment of the UK’s economic outlook that inflation is on course to peak at a higher rate in the second half of this year than previously forecast.
Price spikes in food and energy and the higher cost of business services would push the consumer prices index to 4% in September, it said, before falling only slowly to an average of 3% in a year’s time.
The MPC made clear that workers who sought to outrun this inflationary surge with higher wage claims would be likely to persuade the committee to bring its policy of slow and steady credit loosening to a grinding halt.
This concern about wage rises, especially in the services industry, and a rise in food inflation to 5.5% later this year, is why financial markets judged that interest rates would fall more gradually over the next year than they expected this week.
The committee’s judgment on this occasion was more about the number of redundancies, which are growing, and unemployment, which is rising at a time when business and consumer confidence remains subdued.
Yet even this trend was qualified by a concern that while wage settlements have fallen towards the Bank’s equilibrium target of 3.25%, at 3.75% they remained too high.
A reversal of the downward trend would be likely to persuade the Bank’s governor, Andrew Bailey, to join those who want to freeze rates.
Bailey voted with three other MPC members to cut interest rates by 0.25 percentage points against four members of the committee who said the Bank should pause until there was more clarity about the path of wages and inflation. A vote by the external member, Alan Taylor, for a half-point cut completed the voting.
To break the deadlock, Bailey called for a second vote and Taylor relented, reluctantly, we assume, lending his vote for a more modest quarter-point reduction.
The split on the MPC illustrates the dilemma facing all policymakers as the UK economy staggers through 2025.
Rachel Reeves will be cheered that the Bank stuck to a forecast of a rise in economic growth in the last quarter of the year to 0.3% when other forecasters – notably the National Institute of Economic and Social Research – believe that Threadneedle Street’s prediction of 0.1% in the third quarter will be repeated in the fourth.
All positive figures are music to Treasury ears, however modest, but the chancellor knows the Bank’s forecasts present her with big challenges.
In addition to the pain that fewer jobs and higher prices will inflict on household incomes, she will be concerned that conceding inflation-busting wage rises across the public sector will make life harder for the MPC to make further interest rate cuts.
Public sector unions are queueing up to demand better living standards, and the impact is double-edged. Not only will it put pressure on the Bank to abandon further cuts, the extra costs to the exchequer will also be intense when there are already plenty of predictions of a deficit in the autumn budget.
Another big bill for the Treasury, and one it will not be able to resist, is a rise in the state pension. Unlike the UK’s 31 million workers, 12 million pensioners have a triple lock guarantee that means their annual incomes rise in line with average earnings, inflation or a minimum of 2.5%.
The increase is tied to the September inflation number. If it hits 4%, as expected by the Bank, pensioners will be in the top rank of earners when the rise is applied next April.