Last week’s spending review revealed Rachel Reeves’s plan for reviving the UK’s struggling economy – but one of the most powerful levers for unleashing growth lies out of her reach, at the Bank of England.
Thursday’s no-change decision on interest rates from the Bank’s nine-member monetary policy committee (MPC) was widely expected; but the chancellor and her colleagues will be fervently hoping for a cut in August, perhaps sooner – and more before the year is up.
The Bank’s governor, Andrew Bailey, had already warned the pace of rate cuts looked uncertain, as a result of Donald Trump’s trade wars. The alarming prospect of a fresh conflict in the Middle East is likely to have made MPC members even more cautious.
The minutes from Thursday’s meeting suggested the MPC would “remain sensitive to heightened unpredictability in the economic and geopolitical environment,” and would “continue to update its assessment of risks to the economy”.
Evidence of rising food prices in the latest inflation data is also likely to have preyed on their minds – driven in part by climactic challenges, including the poor harvests that triggered the largest annual increase in chocolate costs on record. Inflation is expected to remain around its current level of 3.4% for the rest of the year – well above the Bank’s 2% target.
Yet the minutes did also suggest the balance of opinion is shifting towards loosening policy, as the jobs market continues to slow down, helping to alleviate concerns about bumper wage deals driving up inflation.
The MPC now expects the impact of Trump’s tariffs to be less dramatic than at its last forecast in May, given various concessions and deals – though they stress that “trade policy uncertainty would nevertheless continue to have an impact on the UK economy”.
Dave Ramsden, deputy governor, voted for a quarter-point cut, to 4% – joining the external members Alan Taylor and Swati Dhingra, both of whom wanted a bigger-than-consensus half-point reduction in May.
The paragraph of the minutes that set out their argument pointed to the fact that “the cumulative evidence from a range of labour market data pointed to a material further loosening in labour market conditions”.
Ramsden has previously been slightly ahead of the consensus in moving to cut – he was ready for rates to come down in May last year, three months before the eventual reduction in August; and wanted to see a cut in December, that didn’t happen until February.
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The other two doves voted for a bumper half-point cut in May, so it is no surprise that they would have liked to have seen another reduction on Thursday.
Dhingra told MPs on the Treasury select committee recently that she was becoming increasingly concerned about the risk that holding policy “too tight” for an extended period – ie keeping rates high – risked undermining the economy’s potential to grow.
Bailey confirmed alongside Thursday’s no-change decision that rates remained on a “gradual downward path”. That appears to point to another quarter-point cut in August. Reeves will be hoping the MPC picks up the pace.