A rate cut is coming, but elections could delay it | Business News

The Bank of England’s monetary policy committee (MPC) would never cut interest rates today. Not two weeks before a general election.

Reducing the cost of borrowing would have been seen as highly political, potentially offering support to the government, although some Conservative politicians, such as former business secretary Jacob Rees-Mogg, sought to argue before today’s decision that not cutting Bank could equally be understood as “a political decision against the government”.

So it was no surprise to see the MPC maintains bank rate by 5.25% or, in fact, for the composition of the vote, at 7-2, to remain unchanged from last time, with Swati Dhingra and Sir Dave Ramsden, again, outnumbered in the vote for the bank rate to be reduced to 5%.

Latest Money:
Blow to borrowers as interest rate holds again

The MPC has also taken pains to show how perfectly attuned it is to criticisms of bias from one side or the other.

The minutes state: “The committee noted that the timing of the 4 July general elections was not relevant to its decision at this meeting, which would, as usual, be taken on the basis of what was considered necessary to achieve the inflation target of 2 % sustainably in the medium term.”

Politics aside, however, there were good reasons why the majority of the MPC voted in favor of no change today.

The main one was the fact that, although the overall rate of consumer prices inflation in May returned to the Bank’s target of 2% for the first time since July 2021, services inflation remains uncomfortably high at 5.7%.

This will have raised the alarm in the MPC about the risk of so-called “second-round effects”, in which companies and workers respond to higher prices by seeking to increase their prices or wages themselves and, above all, because services they make up four-fifths of the UK economy.

The MPC minutes said today that services inflation was “slightly higher than projected” when the Bank published its most recent inflation report, just last month.

The minutes added: “This strength partly reflects indexed or regulated prices, which typically change only annually, and volatile components.”

The MPC is also very cautious about the possibility of inflation starting to rise again later in the year. This is due to the so-called “base effects” – the annual comparison – and the fact that, in the second half of last year, the price of some goods in the inflation basket fell or, at least, did not increase quickly, as It is expected to happen in the second half of last year. A good example of this, which stood out in the inflation figures released on Wednesday, is unleaded petrol – which cost 144.4p a liter in May last year, but which cost 148.8p in May this year.

And, more generally, the economy is growing more strongly than the Bank expected, as are several indicators of economic activity, including household spending on the repair and maintenance of their homes and consumer confidence.

The other major concern that the MPC continues to have is that wage inflation, at 6% for the three months to the end of April, remains too high for its liking.

The latest report from the Bank’s regional agent network – whose briefings are closely studied by MPC members – suggests that recruitment difficulties are “close to pre-COVID levels”, which represents “a historically high level”.

Other survey data also persuaded the MPC to conclude that the labor market remains “slightly more restrictive than official data” suggests.

The minutes highlight concerns that near-term wage growth may moderate to less than the Bank expected in its May report. Consumer-facing companies, which are more exposed to the national living wage, in particular, are having to pay employees more.

That said, a bank rate reduction is looming, with the MPC noting: “The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labor market and is exert pressure on inflationary pressures. Key indicators of inflation persistence continued to moderate, although it remains high.”

The timing of this reduction will now be more debated than ever. Wednesday’s inflation data, with that unexpectedly strong reading for services inflation, boosted market expectations for the timing of the first cut, from August to September.

Today’s minutes, however, persuaded some market participants to conclude that an August bank rate reduction may be back.

The main line in the minutes that raised this prospect was that, among some MPC members who voted for no change this month, “the political decision at this meeting was perfectly balanced”.

Therefore, the big conclusion from today’s minutes is that the door remains open for a reduction in the bank rate in August. The market was estimating the probability of an August rate cut at 30% before the meeting. Now he’s putting a 60% probability on that.

But a rate cut in August is not agreed upon – and politics could still loom.

Read more about business:
Sainsbury’s sells banking arm to NatWest
Sale of Four Seasons lots to nursing home operator
Taylor Swift shows ‘to boost economy by £300m’

The MPC will be attentive, attentive to how the markets react to the election results.

As Julian Howard, chief multi-asset investment strategist at GAM Investments, said: “A potential Labor Party landslide could disrupt markets, in particular the currency.

Sir Keir Starmer has been under pressure in recent days over the issue of taxes and spending. Sterling will appreciate neither unfunded spending nor a heavier tax burden.”

A weaker pound, in turn, would revive concerns about imported inflation.

And that would likely persuade MPC members to maintain the cautious approach they and their counterparts at the US Federal Reserve have taken this year for at least another month.