The Bank of England has cut interest rates to 4 per cent. Threadneedle Street’s Monetary Policy Committee (MPC) has just voted five to four, after a revote, for what is the third cut this year. This takes interest rates back down to levels not seen since the beginning of 2023. Concerns about an increasingly slack labour market seem to have driven the MPC’s decision.
A second vote was required – the first since 1998 – because initially four members of the committee voted for a 0.25 per cent cut but one member voted for a larger cut of 0.5 per cent. Markets expect the rate to be cut once more to 3.75 per cent before Christmas.
Governor Andrew Bailey sounded cautious, saying: ‘We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.’
Starmer will welcome the news. Indeed, yesterday he pointed to falling interest rates as a solution to plugging the £50 billion fiscal black hole his Chancellor reportedly now has to fill. But whether the rates decision will lead to good things in the longer term seems up for debate.
The Bank has certainly followed the economic consensus – the Times and City AM both made similar calls – but others, including former rate setters, question the wisdom of unleashing fuel into the economy via lower rates while inflation runs hot again.
Some even argue that the Bank has now forgotten its entire mission: squashing inflation. Under the governorship of Mervyn King, consumer inflation averaged 2.7 per cent. Mark Carney achieved 1.6 per cent. Under Andrew Bailey, it has averaged 4.5 per cent – more than twice his mandated target.
Recent household surveys suggest the public still expects rising prices over the next year. Core inflation remains sticky, wage growth is strong – whatever the Bank says – and services inflation shows little sign of easing. In other words, it doesn’t look like inflation is going away.
The Bank’s apparent comfort with loosening policy in this context is baffling. Its own forecasts show inflation climbing back to 4 per cent by September – double the official target. If they’re wrong, and inflation slips the leash again, it won’t be brought back under control easily.
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