The Bank of England has reduced interest rates from 4.25% to 4%. In many ways this decision is an affirmation of their long-term concerns about inflation and the overarching economic growth. Andrew Bailey, the new Governor of the Bank, supported the quarter-point cut. He was supported in this decision by three other members of the MPC. The committee continues to sail between Scylla and Charybdis of conflicting economic indicators. Yet some of the new members are advocating for a temporary halt to rate increases.
There was dissent among the MPC members on the decision to cut the base rate. Four members expressed their wish to make no change to the existing rate. Though he was the first to call for a half-point cut, Alan Taylor was on board with the quarter-point reduction. The divergence of opinions even within the committee speaks to the difficulty that policymakers are grappling with as economic indicators bounce all over the place.
The main implications of this interest rate cut, and particularly with respect to pensioners, are major. The Bank of England’s interest rate hikes are directly linked to the falling inflation rate forecast at 4% in September. Expected jumps in food costs are fuelling this increase in inflation. Experts are already predicting that these prices will rise to 5.5% by the end of this year. As a consequence, around 12 million pensioners will experience significant real increases in their annual incomes next April. They are riding on a triple lock guarantee linked to this high inflation measure.
The triple lock guarantee increases pensioners’ incomes. It ensures annual increases according to a formula using either average earnings, inflation, or at least 2.5%, whichever is greatest. With inflation just shy of the 4% cap, pensioners may soon be some of the highest compensated when these changes are implemented.
Moreover, the broader economic landscape remains uncertain. The Bank of England now sees just 0.3% growth in the final quarter of this year. On the other hand, the National Institute of Economic and Social Research predicts a more cautious growth figure of just 0.1%. This variation in forecasts is a testament to the uncertainty of economic conditions and the overall pessimistic forecast of economists.
That puts the consumer prices index (CPI) inflation on course to increase again, to 4% in September. This big jump is largely driven by skyrocketing food and energy prices—including rapid increases in the cost of business services. Further, inflation has already likely peaked at this historic level. After that it will slope downward to an average of 3% over the course of a year. In this context, such projections lead to serious doubts about the durability of any economic recovery and foreshadow a critical hit to consumer spending.
The Bank of England’s announced interest rates cuts, designed to stimulate economic activity, are responding directly to these challenges. By lowering borrowing costs, it hopes to stimulate spending and investment. Such a strategy would be more supportive of robust growth and increasingly lower inflation in the long run.