Interest rate cut is not far off – but there are complicating factors
How soon is too soon?
That’s the question exercising members of the Bank of England‘s monetary policy committee (MPC) at the moment. All nine members know that interest rates, currently at 5.25%, will have to be cut in the coming months.
After all, high interest rates represent a brake on the economy and it’s becoming clear that keeping the brake pedal down is causing economic pain.
Money latest: Reaction as Bank of England holds off on rate cut
Unemployment is beginning to rise; the strength of consumer demand is dropping and, most of all, inflation is coming down too.
For Bank insiders, the fact that the rate at which the consumer price index is rising each year is about (at least according to their forecasts) to hit 2% is a mark of success.
Not long ago, as prices rose at the fastest rate in decades, many in the City wondered whether the Bank might have lost control of inflation – which it is supposed to keep as close as possible to 2%.
While the indicator’s fall is partly down to the volatility of energy prices (having been the main force lifting prices in recent years, they are now the main force depressing them), what gives the Bank’s policymakers hope is that while CPI inflation is expected to bounce back slightly in the coming months, their forecast suggests it will not exceed 3%.
The upshot is that inside the Bank there are some who are now whispering quietly that they might have succeeded – inflation might have been tamed.
But that brings us back to that question: if inflation is tamed then there’s no need to have interest rates so high, so how soon should they be cut?
Complicating factors is what’s happening on the other side of the Atlantic, where the Federal Reserve, America’s central bank, has committed something of a U-turn.
Higher US rates would tend to weigh on the pound, making imports bought in dollars more expensive. Pic: Reuters
Having guided investors and economists a few years ago that an interest rate cut was coming soon, the Fed chair, Jerome Powell, has more lately hinted that no cut was coming anytime soon.
And since America usually leads the way on interest rates, that raises an unnerving question: can the UK really begin cutting rates so long before the Federal Reserve?
The Bank’s internal assessment is quite simply that the British economy is in a very different place to America. The US is growing very strongly indeed, partly thanks to large federal spending programmes pumping cash into green tech and semiconductor manufacturing.
There is nothing analogous in the UK, whose economy is expected to grow by 0.9% over the next 12 months or so.
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That’s an upgrade on the previous 0.6% forecast, but is only a fraction of the 2%+ growth enjoyed in the US.
In the coming weeks, we’re expecting an unusually important set of economic numbers. Inflation data for April is expected to show a big fall, down to 2%. There are some jobs data and, of course, tomorrow we learn whether the UK has bounced out of its current recession (it almost certainly has).
In the end, this data is what will determine whether the MPC is bold enough to cut rates in June or in August (or, if the data shows an unexpected increase in inflation, to put those cuts off for longer).
So it’s a waiting game. But it looks like there’s not that much longer to wait.
Winter fuel payments will extend to everyone over the state pension age with an income of or below £35,000 a year, Chancellor Rachel Reeves has announced.
The Treasury said the change will cost around £1.25bn in England and Wales but still save £450m if the universal allowance had been kept.
Politics Live: Chancellor makes winter fuel announcement
Dropping the benefit for all pensioners was one of the first things Labour did in government, despite it not being in their manifesto.
The change meant only those on pension credit or other benefits were eligible – a deeply unpopular move that was widely blamed on the party’s poor performance in May’s local elections.
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Ms Reeves said: “Targeting winter fuel payments was a tough decision, but the right decision because of the inheritance we had been left by the previous government.
“It is also right that we continue to means-test this payment so that it is targeted and fair, rather than restoring eligibility to everyone, including the wealthiest.
“But we have now acted to expand the eligibility of the winter fuel payment so no pensioner on a lower income will miss out.”
The government signalled its intention to widen eligibility last month, but no detail was given on what the new threshold might look like.
The lack of clarity threatened to overshadow Ms Reeves’ spending review on Wednesday, when she will set out what funding has been allocated to each government department over the next three years.
The chancellor repeatedly faced questions on winter fuel during a speech in Manchester last week to promote a £15.6bn funding settlement for local transport projects, when she said changes would be in place for this winter.
However ministers still could not give further detail, with Science Secretary Peter Kyle telling Sky News on Sunday that the new eligibility would be set out “in the run up to the autumn”.
It is still not clear how the new policy will be funded, with the costs to be accounted for in the autumn budget.
Asked by Sky News’ deputy political editor Sam Coates if the change is a signal to markets that she can’t say no to her MPs, Ms Reeves said after her spending review “markets and the public will be able to see public services living within their means”.
‘Humiliating U-turn’
Tory leader Kemi Badenoch said: “Keir Starmer has scrambled to clear up a mess of his own making. I repeatedly challenged him to reverse his callous decision to withdraw winter fuel payments, and every time Starmer arrogantly dismissed my criticisms.
“This humiliating u-turn will come as scant comfort to the pensioners forced to choose between heating and eating last winter. The prime minister should now apologise for his terrible judgement.”
The Treasury said that by setting the threshold at an income of £35,000, over three-quarters of pensioners – around nine million people – will benefit.
The universal system meant some 11.4 million pensioners were in receipt of the benefit, which was slashed down to 1.5 million when the initial means-test was brought in.
The new threshold is above the income level of pensioners in poverty and broadly in line with average earnings, the Treasury said.
No pensioner will need to take any action as they will automatically receive the payment this winter.
“It’s a big deal for this government,” says Simon Case.
“It’s the clearest indication yet of what they plan to do between now and the general election, a translation of their manifesto.
“This is where you should expect the chancellor to say, on behalf of the government: ‘This is what we’re about’.”
As the former cabinet secretary, Mr Case was the man in charge of the civil service during the last spending review, in 2021.
On Wednesday, Rachel Reeves will unveil the Labour government’s priorities for the next three years. But it’s unclear whether it will provide all that much of an answer about what it’s really about.
Unlike the Autumn budget, when the chancellor announced her plans on where to tax and borrow to fund overall levels of spending, the spending review will set out exactly how that money is divided up between the different government departments.
Since the start of the process in December those departments have been bidding for their share of the cash – setting out their proposed budgets in a negotiation which looks set to continue right up to the wire.
This review is being conducted in an usual level of detail, with every single line of spending assessed, according to the chancellor, on whether it represents value for money and meets the government’s priorities. Budget proposals have been scrutinised by so called “challenge panels” of independent experts.
It’s clear that health and defence will be winners in this process given pre-existing commitments to prioritise the NHS – with a boost of up to £30bn expected – and to increase defence spending.
On Sunday morning, the government press release trumpeted an impressive-sounding “£86bn boost” to research and development (R&D), with the Science and Technology Secretary Peter Kyle sent out on the morning media round to celebrate as record levels of investment.
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What will be in spending review?
We’re told this increased spending on the life sciences, advanced manufacturing and defence will lead to jobs and growth across the country, with every £1 in investment set to lead to a £7 economic return.
But the headline figure is misleading. It’s not £86bn in new funding. That £86bn has been calculated by adding together all R&D investment across government for the next three years, which will reach an annual figure of £22.5bn by 2029-30. The figure for this year was already set to be £20.4bn; so while it’s a definite uplift, much of that money was already allocated.
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Peter Kyle also highlighted plans for “the most we’ve ever spent per pupil in our school system”.
I understand the schools budget is to be boosted by £4.5bn. Again, this is clearly an uplift – but over a three-year period, that equates to just £1.5bn a year (compared with an existing budget of £63.7bn). It also has to cover the cost of extending free school meals, and the promised uplift in teachers’ pay.
In any process of prioritisation there are losers as well as winners.
We already know about planned cuts to the Department of Work and Pensions – but other unprotected departments like the Home Office and the Department of Communities and Local Government are braced for a real spending squeeze.
We’ve heard dire warnings about austerity 2.0, and the impact that would have on the government’s crime and policing priorities, its promises around housing and immigration, and on the budgets for cash-strapped local councils.
The chancellor wants to make it clear to the markets she’s sticking to her fiscal rules on balancing the books for day-to-day spending.
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But the decision to loosen the rules around borrowing to fund capital investment have given her greater room to manoeuvre in funding long-term infrastructure projects.
That’s why we’ve seen her travelling around the country this week to promote the £15.6bn she’s spending on regional transport projects.
The Treasury team clearly wants to focus on promoting the generosity of these kind of investments, and we’ll hear more in the coming days.
But there’s a real risk the story of this spending review will be about the departments which have lost out – and the promises which could slip as a result.
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