MPC Unlikely To Lower Rates In December As Inflation Moves Up

Today's rise in UK inflation, coupled with wider anticipated global inflationary pressures from President Trump's trade tariffs and tax policies and compounded by the Chancellor's Autumn Budget fiscal measures, are likely to result in higher interest rates for longer. This scenario exerts significant pressure on businesses, amplifying investment hesitancy and underscoring the critical need for businesses to adapt their lending strategies to withstand ongoing market uncertainty.

Recent data from Manx Financial Group reveals an improvement, with nearly a third of UK SMEs scaling back or pausing operations due to financial constraints—down from 40% in 2023. However, around 10% of SMEs continue to face challenges in accessing external financing. Given their pivotal role in fostering growth, employment, and innovation, creating a stable and supportive lending environment is crucial.

Achieving this requires focused efforts by the Labour Government to improve credit access while managing inflationary pressures. Collaboration between traditional and alternative lenders is also necessary to ensure SMEs receive the financial support needed to navigate rising taxes, geopolitical instability, and cost-of-living challenges.

While there’s been a small rise in the headline inflation figure this month, this is a result of changes in the energy price cap – wider measures of inflation show producer prices falling and below target.

But the high and rapidly rising inflation rates of recent years now appear to be behind us, and it is welcome that interest rate cuts are underway.

Of course, prices are still far higher than they used to be and pressure on household budgets remains immense.
The Budget showed that the government is ready to take strong action to fix the broken economy they inherited from the Tories.

Increased public investment is a vital first step to securing the stronger growth, higher wages and decent services that the country desperately needs.

And the Bank of England must keep moving with interest rate cuts to support the economy and protect working families.

Inflation has moved up pretty much as expected, reflecting movements in the OfGem price cap. Elsewhere recent official data on wages has also come in in-line with the Bank of England’s forecasts. But economic conditions are evolving rapidly following a painful Budget for business, that significantly increases the costs of employment and injects inflationary pressure into a constrained economy. Inflation is now set to be higher for longer as firms pass through the impact of higher costs into higher prices, and as higher public spending over the next couple of years further generates inflationary pressures. Interest rates are likely to come down more slowly, adding to financing costs for both households and businesses, constraining consumption and investment.

Unfortunately, while the recent Budget stabilised the public finances, it has undermined growth in the private sector, shattering business confidence and renewing inflationary pressures. Broader efforts to improve the environment for investment have been overwhelmed by distortionary tax raising measures. We will continue working with the government to improve the operating environment for business, for example, through pushing for tax simplification to move up the government priority list and engaging in the consultation process around workers’ rights.

Inflation was always expected to pick up in October, but the increase was bigger than the Bank of England had expected. We’ll continue to see bumpier inflation over the coming months, as more base effects play out in the data. But the big picture should still remain one of headline inflation being much lower than this time a couple of years ago.

Despite the upside surprise in today’s data, the Bank is still likely to continue cutting rates at a gradual pace going forward. However, renewed price pressures from the fiscal loosening in October’s Budget means that the CPI rate is likely to stay above the 2% target for longer than previously expected. Coupled with continued strength in services price inflation and wage growth, this all but rules out the prospect of a faster pace of rate cuts in the year ahead.