A reduction in interest rates by the Bank of England should rank as a joyful summer gift to borrowers weighed down by the high cost mortgages and loans.
Yet the latest quarter-point cut to the cost of borrowing, from 4.25% to 4%, is laced with so many warnings, any celebration will be muted.
Most prominently, the Bank’s monetary policy committee (MPC) said in its latest assessment of the UK’s economic outlook that inflation is on course to peak at a higher rate in the second half of this year than previously forecast.
Price spikes in food and energy prices and the higher cost of business services will push the consumer prices index to 4% in September, it said, before falling only slowly to an average of 3% in a year’s time.
The MPC made clear that workers who sought to outrun this fresh inflationary surge with higher wage claims would be likely to persuade the committee to bring its policy of slow and steady credit loosening to a grinding halt.
The committee’s vote was more about the number of redundancies, which are growing, and unemployment, which is rising at a time when business and consumer confidence remains subdued.
Yet this trend was qualified by a concern that while wage settlements have fallen towards the Bank’s equilibrium target of 3.25%, at 3.75% they remained too high.
A reversal of the downward trend would be likely to persuade the Bank’s governor, Andrew Bailey, to join those who want to freeze rates.
Bailey voted with three other MPC members to cut interest rates by 0.25 percentage points against four members of the committee who said the Bank should pause until there was more clarity about the path of wages and inflation. A vote by the external member Alan Taylor for a half-point cut completed the voting.
To break the deadlock, Bailey called for a second vote and Taylor relented, reluctantly, we assume, lending his vote for a more modest quarter-point reduction.
The split on the MPC illustrates the dilemma facing all policymakers as the UK economy staggers through 2025.
Rachel Reeves will be cheered that the Bank stuck to a forecast of a rise in economic growth in the last quarter of the year to 0.3% when other forecasters – notably the National Institute of Economic and Social Research – believe that Threadneedle Street’s prediction of 0.1% in the third quarter will be repeated in the fourth.
All positive figures are music to Treasury ears, however modest, but the chancellor knows the Bank’s forecasts present her with major challenges. She will be concerned that conceding inflation-busting wage rises across the public sector will make life harder for the MPC to make further cuts in interest rates.
Public sector unions are queueing up to demand better living standards and the costs will also give her a financial headache when there are plenty of predictions of a looming deficit in the autumn budget.
Another big bill for the Treasury, and one it will not be able to resist, is a rise in the state pension. Unlike the UK’s 31 million workers, 12 million pensioners have a triple lock guarantee that means their annual incomes rise in line with average earnings, inflation or a minimum of 2.5%.
The increase is tied to the September inflation number. If it hits 4%, as expected, pensioners will be in the top rank of earners when the rise is applied next April.
