business

Pre-Christmas Rate Cut Is Little To Cheer

Monetary Policy Committee of the Bank of England to reduce interest rates to 3.75%

Image by Pete Linforth from Pixabay

Responding to the Bank of England's rate announcement, Julian Jessop, Economics Fellow at the Institute of Economic Affairs said:

"The Bank of England’s decision to cut interest rates by 0.25% today was widely expected but still a close call, with four of the nine MPC members voting for no change. Moreover, the statement accompanying the decision was relatively hawkish, which will disappoint those hoping for more aggressive cuts.

"The statement cited "subdued economic growth and building slack in the labour market" as key factors. In other words, the weakness of the economy and mounting job losses offset persistent worries about inflation, but only just. This is not much to cheer.

"There was a strong case for leaving rates on hold until the next meeting (in the first week of February) to allow more time to assess the fallout from the Budget and to boost the MPC's anti-inflation credibility. The Bank of England’s job is to worry about inflation, not to bail out a government which has no growth strategy of its own.

"Nonetheless, the slimmest of majorities judged - not unreasonably - that the recent economic data were soft enough to increase confidence that inflation will fall back to the 2% target next year.

"At their new level of 3.75%, interest rates are still at the high end of a neutral range of 3%-4%. One or two more cuts are therefore likely next year. However, this is only happening because demand is weak and businesses are finding it even harder to pass on rising costs.

"It would be far better if rates were being cut because the supply-side performance of the economy was improving and productivity was increasing, allowing faster growth without higher inflation.

"Unfortunately, this is unlikely to happen as long as the government pursues policies built around higher public spending, higher taxes, and even more state intervention."

Alpesh Paleja, Deputy Economist, CBI, said:

“Today’s rate cut came as no surprise. Over the past month we’ve seen clearer evidence of easing inflation, slower pay growth, a loosening labour market and weak economic growth. Measures in the government’s Budget also look unlikely to add to inflationary pressures. Taken together, this seems to have been enough for Governor Andrew Bailey – the swing vote on the MPC – to back a cut.

“But the Committee remains deeply divided on the degree of inflation persistence in the economy, as the narrow vote showed. If inflation continues to fall in line with the Bank’s forecasts, we expect one further cut early next year, taking rates to a terminal level of 3.5%. But given the level of disagreement around the table, it wouldn’t take much for that final move to be pushed further into 2026.”

Anna Leach, Chief Economist at the Institute of Directors, said:

“The MPC voted as widely expected to reduce rates by 25 basis points to 3.75% – the lowest they’ve been since January 2023. The vote split was likewise as expected, with the Governor the swing voter, swayed by multiple data points – activity, unemployment, wages and inflation – all giving the all-clear for gently easing back on monetary constraints.

“Interestingly, the Bank of England judge that the Budget on balance added to overall inflationary pressures, with the short-term 0.5% point reduction in headline inflation in 2026 more than offset by fiscal loosening over the next couple of years, leading to inflation marginally higher in 2027 and 2028. But a weaker outlook for gas and fuel prices, along with some easing in inflation expectations, pay growth, the broader labour market, demand as a whole and inflation itself gave enough members of the MPC comfort to lower rates. There’s still residual concern that wage growth and services both remain elevated, but counterbalanced by the reality that business and consumer confidence remains depressed, injecting caution into spending and therefore demand.

“Looking into next year, inflation should keep tracking down. Overall risks to the inflationary outlook remain balanced, suggesting the MPC will continue to be cautious in lowering rates further – particularly when inflation has only been in the target range for 24% of the past four years. But it’s notable that the Bank has revised their Q4 GDP expectation to zero, quite a change from the 0.3% growth they expected only 6 weeks ago, and a weak springboard for 2026. If confidence doesn’t lift, the economy might need a bit more monetary support.”