The Bank of England’s decision to hold interest rates steady at 4% will create a more challenging environment for the Chancellor ahead of the Autumn Budget.
In a widely-anticipated move, the central bank’s Monetary Policy Committee voted by a majority of 7-2 to maintain the rate, while two members voted to reduce the rate to 3.75%.
The bank has cut interest rates five times since August last year as the pace of inflation eased. However, since April inflation has been trending higher again. Twelve-month CPI inflation was 3.8% in August and is expected to increase slightly in September, before inching down towards the 2% target thereafter.
Against this backdrop, market experts said a further rate cut this year is unlikely. However, this is likely to create challenges for the Chancellor ahead of the Autumn Budget.
Lindsay James, investment strategist at Quilter, said: “This is a far from ideal scenario for the Government as it contends with persistently high inflation. In fact, markets are not fully pricing the next rate cut until the end of April next year.
“With the Budget rumour mill in full swing and an expected downgraded in productivity from the Office for Budget Responsibility at the time Rachel Reeves stands to deliver the Budget, economic growth is likely to be desperately lacking for the remainder of the year. For now, inflation is the big concern and appears to be an issue neither the BoE nor the Government can tame.”
Laith Khalaf, head of investment analysis at AJ Bell, said: “There is now just one more interest rate decision before the November Budget, and Rachel Reeves would dearly love to see some more dovish vibes coming from the Bank of England to relieve some pressure on the public finances.
“The exchange of letters between the governor and the chancellor is all pretty perfunctory, though Rachel Reeves does say that she and the prime minister have asked government departments to look at what can be done to lower consumer prices ahead of the Budget. Whether anything comes of that remains to be seen, but tax rises rather than inflation controls will almost certainly be the main thrust of the Budget in November, like it or not.”
John Wyn-Evans, head of market analysis at Rathbones, said: “The Government would dearly love to see lower interest rates to stimulate the housing market and consumer demand more generally. However, the Bank of England is displaying its independence at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders, with the battle between the White House and the US Federal Reserve being most critical.
“This leaves Chancellor Rachel Reeves struggling to balance the books, and her task will be made even more difficult should reports that the Office of Budget Responsibility is set to reduce its forecast for the UK’s productivity growth be proved correct.”
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