Don’t panic, there’s still hope for interest rate cuts

Of all the losers from the Bank of England’s decision to hold interest rates - which includes the 591,000 people currently on tracker mortgages, as well as those among the 7.1 million households on fixed rate mortgages who are scouting around for a new deal - the biggest loser of all could be one Rachel Reeves. The chancellor needs the British economy to start firing. Number 11 has very little headroom if it is to keep to Reeves’ fiscal rules, which prohibit borrowing to fund day-to-day government spending, and avoid a tax-raising Budget in the autumn.

Base rates at the current 4.25 per cent — described by the Bank as “restrictive” — are throttling the growth that could ease the pressure, and provide some much needed assistance to businesses struggling under the weight of high financing costs, not to mention mortgage holders grappling with high costs.

Three members of the rate-setting Monetary Policy Committee were sufficiently worried about the economy — and the prospect of inflation dipping below the Bank’s 2 per cent target next year — to vote for an immediate cut. True, they were the usual suspects - dove-in-chief Swati Dhingra, an external MPC member, Alan Taylor, also an external member and the first Reeves appointment, and Dave Ramsden, one of the Bank’s deputy governors. However, that all three of them combined to vote to defy market expectations and cut now, together with comments from governor Andrew Bailey after the decision was made public, have raised hopes that a cut could come in August. The City was previously betting on September as the more likely date.

While even August may not come soon enough for Reeves, business groups would certainly cheer given the headaches created by higher taxes, rampant uncertainty and rising wages, especially at the bottom of the scale where those on the minimum wage have been granted a big raise.

That is welcome. But we are starting to get to the level at which it’s fair to at least debate how much further the floor can be raised before damaging the labour market and the wider economy, particularly given how shaky the latter currently is.

Some companies have also clearly responded by squeezing those in roles that pay just above the minimum. The increase could thus be filed under the heading “no good deed goes unpunished”.

The unstable global picture, dominated by conflicts that look increasingly frightening, inevitably complicates the MPC’s job. The outbreak of hostilities between Israel and Iran has already driven a sharp rise in the oil price, and a lesser, but still significant rise in natural gas prices.

Pay close attention to the latter in particular, given the impact it could have on OfGem’s next energy price cap, and the inflationary impact higher gas prices have caused in the past. Britain remains over-reliant on wholesale gas prices, a longstanding and vexatious problem that will not be fixed easily or quickly.

The Bank said it was “monitoring” the situation, but its rate-setters could easily find themselves caught between a rock and a hard place if the conflict damages the economy while also stoking inflation. Stagflation — a stalling economy, with high inflation and high interest rates — is the nightmare scenario.

What really doesn’t help matters is the unreliable data the Bank has been receiving from the Office for National Statistics (ONS), particularly the longstanding problems with its labour force survey. It also recently emerged that it got the April inflation number wrong. This represents a huge problem. If the labour market is weaker than the official numbers suggest, and wage settlements are lower, then there would be more scope to cut rates, to the economy’s benefit.

Recruitment firm Hays has seen its shares slump to a 14-year low as a result of a global slowdown in hiring, with its UK and Ireland division a notable weak sport. A 13 per cent decline in fees were forecast in the domestic market while the company expects a 9 per cent decline across the group as a whole. The ONS needs to fix its problems. It simply isn’t good enough.

As it is, the MPC is predicting a “significant slowing” in wage settlements as a result of a looser jobs market, in which vacancies have been tumbling and unemployment rising: even though the MPC trotted out its usual line about taking a “cautious” approach to cutting rates, while making clear that their path is not “pre-determined”, that is another hint that an August cut could be in the works.

Immediate beneficiaries would be those looking to buy homes or remortgage their existing residences. Fixed-rated deals have risen recently because the markets reset their expectations of the pathway for rates. Another change in sentiment could improve deals again.

Capital Economics, for one, thinks rates could fall to as low as 3.5 per cent, even with inflation not expected to move back towards the 2 per cent target until next year, with the current 3.4 per cent rate expected to peak at 37 per cent in September.