Concerns have been voiced that Labour’s significant pay agreements may hinder the Bank of England from reducing interest rates tomorrow.
The Bank faces a difficult decision on whether to lower borrowing costs from the 16-year peak of 5.25 per cent.
Prospects improved when inflation returned to the Bank’s 2 per cent target after nearly three years of high living costs.
Yet, persistent price increases in the services sector—partly due to Taylor Swift’s Eras tour—cast doubt on whether the Monetary Policy Committee (MPC) will act before September.
New Chancellor Rachel Reeves added to these concerns by approving several substantial public sector pay increases this week.
She has also offered junior doctors a 22 per cent raise over two years to end ongoing strike action.
The IMF recently warned that persistent wage and services inflation could mean ‘higher-for-even-longer’ interest rates.
In June, the MPC voted seven to two to maintain interest rates at 5.25 per cent, hinting at a possible reduction.
Former Chancellor Lord Hammond, speaking on Sky News this morning, expressed confidence in rate cuts this year but questioned the timing of such moves about interest rates.
He noted that while the headline inflation rate is stable at 2 per cent, services prices are rising alarmingly, driven by wage increases above the inflation rate.
Hammond suggested the MPC might lean towards waiting longer due to concerns that wage increases could reignite inflation.
Rachel Reeves’ acceptance of the public sector pay review body settlements in full has heightened these concerns, potentially setting a higher benchmark for pay settlements across the board.
Alice Haine of Bestinvest by Evelyn Partners predicted a very close decision for the Bank.
She highlighted that rates remained at a 16-year high of 5.25 per cent for a year amid ongoing inflationary pressures. Economists are split on Thursday’s outcome, with expectations of a narrow five-to-four vote either for a rate cut or to keep the rate unchanged.
UK inflation held at 2 per cent in the 12 months to June, but the Bank is likely worried about other stubbornly high inflation measures.
These include services inflation, a key driver of overall inflation, which stayed at 5.7 per cent in the 12 months to June, matching the previous month. Wage growth, though easing, still outpaces price rises and interest rates.
Stronger economic growth in May, with GDP expanding by 0.4 per cent—double the expected figure—against rising unemployment now at 4.4 per cent, complicates the Bank’s decision further.