Bank’s interest rate vote and bond plans are little help to Reeves before budget
“Gradual” and “predictable” are the watchwords at the Bank of England.But for Rachel Reeves, preparing for a tough autumn budget, a more activist approach from Threadneedle Street could have helped.The central bank had two pieces of bad news for the chancellor on Thursday: borrowing costs would be left unchanged at the current elevated level, while the Bank would proceed with a plan to sell billions of pounds in UK government bonds.Both decisions had been widely expected in financial markets.But an alternative outcome was not outside the realms of possibility and could have helped bail out the Treasury a little before the autumn budget.
With inflation running at 3.8%, almost twice the Bank’s target, the majority of the Bank’s monetary policy committee voted to keep interest rates unchanged at 4%.Households are coming under pressure from the soaring price of food, while business leaders have said the chancellor’s £25bn increase in employer national insurance contributions (NICs) is being passed on to consumers in the form of higher prices.However, two members – the external economists Swati Dhingra and Alan Taylor – shared a concern that Britain’s economy was in weak shape and required rates to be cut by a quarter-point to 3.75%.
Doing so would have been an indictment of the strength of the economy, but could have helped Reeves to argue that Labour was not standing in the way of further reductions in mortgage costs for hard-pressed households,The second decision is more complicated to explain,For the past year the Bank has been disposing of £100bn of UK government bonds in a programme known as quantitative tightening (QT), through a process of selling bonds on its books and not replacing maturing debt,A decision was required on Thursday about what to do in the year ahead,Given increasingly febrile conditions in global financial markets, some leading economists had called for Threadneedle Street to scale back its plan drastically.
Britain’s long-term borrowing costs have hit the highest level in 27 years.Much of the rise is driven by global factors, alongside investor worries over the UK economy and the public finances.But some economists believe the Bank’s QT programme has played a contributing role.On the face of it, the Bank’s decision to scale back QT to £70bn may sound helpful for the chancellor, as slowing the pace would help to soothe fears over a flood of UK bonds being sold into a jittery market.However, to hit its £70bn runoff target, the Bank will actually need to sell more government bonds over the year ahead than it did in the past year, almost doubling its target from £13bn to £21bn.
This is because fewer bonds are set to mature over the coming year, meaning that hitting the £70bn will require more active bond sales,City investors had widely expect the Bank to scale back its QT programme to these levels,But several leading economists, including former MPC members, would have preferred a complete halt to active bond sales,Doing so could have helped Reeves, saving the Treasury more than £10bn a year by IPPR thinktank estimates,A bigger move from the Bank would, however, have sent a signal that it was concerned about conditions in markets and Britain’s elevated long-term borrowing costs.
All told, the Bank sticking to the script predicted by the City neither helps nor hinders Reeves.But it could have been different.And while the chancellor could still hope for a rate cut before her budget – just weeks beforehand at the Bank’s next policy meeting on 6 November – City investors are not holding their breath.
UK faces years of anaemic growth amid tax and regulation burden, says Next
Bosses at the clothing and homeware chain Next are forecasting years of “anaemic” growth across the UK, with the retailer claiming that regulation, government spending and higher taxes will hurt jobs and productivity.The FTSE 100 company, which is headed by the Conservative peer Simon Wolfson, said that while it did not believe the economy was heading towards a “cliff edge”, the weakening outlook gave the company “another reason to be cautious”.“The medium- to long-term outlook for the UK economy does not look favourable,” the retailer said as it released its results for the six months to July.The company, which sells its own-brand clothes and homeware alongside other brands’ products, and controls the UK distribution of the US brands Gap and Victoria’s Secret, said the rising tax burden and government spending commitments, among other factors, were putting pressure on businesses and restricting economic growth.“At best we expect anaemic growth, with progress constrained by four factors: declining job opportunities, new regulation that erodes competitiveness, government spending commitments that are beyond its means, and a rising tax burden that undermines national productivity,” it said
Bank of England holds interest rates at 4% and slows scheme to sell stock of UK bonds
The Bank of England has left interest rates on hold at 4% and will slow the pace of its “quantitative tightening” programme in the year ahead to avoid distorting jittery government bond markets.The central bank’s nine-member monetary policy committee voted 7-2 to leave borrowing costs unchanged, after five cuts since summer 2024, including a reduction last month.The MPC had been widely expected to pause rate cuts this month as annual inflation remained at 3.8% in August, nearly double the target level.The Bank’s governor, Andrew Bailey, said: “Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully
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“She clearly has to fix the problem. I think it’s one thing to come back twice. We don’t want to be here a third time.” Bluntness served Ruth Curtice well in her past life as a senior Treasury official. These days, she deploys it publicly, as chief executive of the Resolution Foundation – urging Rachel Reeves to think the unthinkable before November’s crunch budget
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