Thursday’s interest rate cut to 4.25% is the fourth in a run of reductions that kicked off last August. It represents a fillip for Rachel Reeves, who will hope it helps revive the feelgood factor for gloomy British consumers.
The Bank of England’s nine-member monetary policy committee (MPC) has passed judgment on the impact of Donald Trump’s trade war for the UK – and expects modestly weaker growth and inflation to be the result.
Lower global energy prices as markets anticipate weaker demand, and cheaper Chinese imports, are likely to bear down on costs, the MPC has judged.
And the trade war is likely to shave 0.3% off (already weak) growth in three years’ time, reassuring them that they have a little more space to cut rates.
Inflation, previously predicted to peak at 3.7% later this year, now hits a still-painful 3.5%, before falling back. “The current overall impact of trade developments on the UK is … more likely to be disinflationary than inflationary,” the MPC suggests.
At the same time, it finds little evidence that Reeves’s widely attacked increase in the rate of employer national insurance contributions (NICs), which came into force last month, has so far led to the mass layoffs some lobby groups predicted.
“The impact of higher NICs on employment appears to have been fairly small to date,” the MPC said. It continues to expect firms to use a combination of weaker wages and higher prices, alongside slower hiring, to pass on the costs.
While the chancellor may have hoped the Bank would send a clear message that more confidence-boosting rate cuts are to come, however, the MPC has instead muddied the waters dramatically, by splitting three ways, on the right way forward.
The more dovish stance of two members, Swati Dhingra and Alan Taylor, who backed a half-point reduction, was not surprising. More unexpected, however, were the two votes from the Bank’s chief economist, Huw Pill, and external member Catherine Mann, against any reduction at all.
This caution was reflected in the Bank’s continued use of the carefully drafted phrase “gradual and careful” to describe its approach in the coming months.
As if these evident divisions about the way forward did not speak for themselves, the Bank also made a point of insisting that “monetary policy is not on a pre-set path”. In other words, where rates will be in six months’ time is anyone’s guess.
The quarterly monetary policy report, published alongside Thursday’s rate cut decision, included two possible scenarios: one in which the downbeat mood picked up in recent surveys hits growth harder than feared, driving down inflation; and another in which the bout of higher inflation expected in the summer drives up wages and prices through “second-round effects”.
With mortgage and petrol costs on the slide, and Reeves determined to bear down on public sector pay, it is hard to imagine the bout of bumper pay rises that might cause these effects to materialise – but some MPC members clearly remain scarred by the dramatic post-Covid run-up in inflation.
Meanwhile, the Bank made clear that the US-UK trade agreement, which was confirmed later on Thursday, was unlikely to be a significant boost to growth in itself.
The MPC believes the modest 0.3% hit it forecasts to UK GDP as a result of Trump’s “Liberation Day”, results mainly from the effects of a global trade war, not UK-specific tariffs.
But Labour will hope the combined effect of a mood-boosting rate cut, and the lifting of the clouds that have hung over key sectors – including cars and steel – since Trump’s tariff blitz, will put a much-needed floor under confidence.
