Here are a few reasons Rachel Reeves should be celebrating. In an unexpected turn, last year the Bank of England was leaning toward the doors to begin a new cycle of interest rate cuts. Just last week the Bank lowered the interest rate to 3.75%, a historic first in the Bank’s monetary policy. The City had been looking forward to the announcement of a sixth cut since the previous August. Recent decisions by the MPC have marked a huge change in direction.
In a remarkable meeting, five members of the MPC – including Governor Andrew Bailey – made their case for a Christmas cut. This time, an unexpected four members are convinced that the Fed’s rates of interest cuts have run their course. This divergence in opinions reflects the changing economic reality. In parallel, the Bank’s leaders are already starting to consider the impact of their past moves.
“We still think rates are on a gradual downward path,” “But with every cut we make, how much further we go becomes a closer call.” – Andrew Bailey.
And the Bank of England’s most recent forecast, from noon today, was for flatlining economic growth in the last three months of the year. This economic stagnation greatly complicates their task, as the MPC wades through various competing pressures on the MPC’s decision-making. The recent budget measures introduced by Rachel Reeves are expected to play a significant role in shaping inflation trends going forward.
The Bank thinks these measures will help in a big way with inflation. Beginning in the second quarter of next year, they project a cut of 0.5 percentage points. The budget includes relief on energy bills, rail fares, and prescription charges, all designed to alleviate pressure on consumers and stimulate spending. Earlier this month, the MPC released a statement cautioning against rising price increases. On net, they find that government policies would raise prices by an estimated 0.1 to 0.2 percentage points in 2027 and 2028.
This dynamic gives Labour additional ammunition to defend its record in light of the economic challenges faced. The Bank of England is rethinking its new boring approach to interest rates. This change would go a long way to help immediate borrowers under the squeeze of economic stress. The recent monetary stimulus is a positive step towards alleviating the fiscal crisis many of Britain’s households face due to increasing living costs.
In fact, at least one more cut is virtually priced in by economists over the next year. That’s good news for all those hoping that last month’s autumn budget bolsters calls for continued easing of monetary policy. This interaction between a government effort and economic indicators will be important to keep in mind as the Bank of Canada assesses its future moves.