With the UK government getting ready to announce its next budget, interest rates are once again the focus of much chatter. The case for a potential cut in interest rates next December may strengthen if the budget reveals significant tax increases that do not contribute to inflation. Current UK inflation currently stands at 3.8%, well above the Bank of England’s target rate of 2%. This indicates that the spending or budgetary policy choices we make today will have an immediate impact on monetary policy.
Andrew Bailey, the new governor of the Bank of England, is already looking forward to further rate cuts. This is especially true, he says, when you look at September. He pointed out that the pace of this blunt action is “far less certain.” Uncertainty surrounds the nine-member Monetary Policy Committee (MPC) as it nears a probable split decision. Members are continuing to deliberate the effects of recent economic data and the impending budget on this process.
Analysts are closely monitoring the situation. AJ Bell’s Danni Hewson highlighted that there’s an even bigger possibility of raising the rate by 3.75%. Three cheers, because now it’s sitting at one in three! She stated, “The odds are still firmly in favour of a hold,” indicating that while cuts may be on the horizon, they are not guaranteed.
Consumers are under siege from all sides to include savers, who face a double whammy of declining returns and inflation that’s here to stay. Consumer finance expert Rachel Springall warned that the news could further dampen savers’ spirits. She said that people are “demoralised” in part due to the financial situation.
September’s inflation rate, while better than anticipated, is still a sign of serious economic pressure. Food and drink prices increased at their lowest annual rate in more than a year. This decline is a strong indication that cost pressures may be easing. This evolution will affect how policymakers talk about and want to steer interest rates for the foreseeable future.
After rising to their highest levels in decades, in recent weeks, most other lenders have started cutting interest rates on new fixed-rate mortgages. This disappearing act may look to some as a smart move to lure more clients. Simultaneously, it hopes to preempt central bank cuts. However, as lenders begin to make new products, competition is still incredibly competitive in the mortgage space.
Rachel Reeves has been very clear on this, insisting that the priority has to be fighting inflation. She is keen to set the stage for when conditions are ripe for interest rate cuts.
“Will be focused on getting inflation falling and creating the conditions for interest rate cuts” – Rachel Reeves
As the budget announcement approaches, economic observers will be watching closely for potential tax adjustments and their implications on both inflation and interest rates. The Chancellor of the Exchequer is charged with making crucial decisions that will heavily influence the economic landscape. These predilections will surely guide the future decisions of the Bank of England.
Andrew Bailey’s speech to the TUC is a reminder that we are in an unprecedented economic situation.
“It’s possible Rachel Reeves’ surprise press conference on Tuesday was partly a cry for help to the Bank of England” – Danni Hewson