With four 25-basis-point cuts over the past year, the current run rate is a neat “quarter per quarter.” But while markets may have priced in two further reductions this year, that’s far from guaranteed. The “intensified uncertainties” facing the economy mean the Bank of England is anything but on autopilot.
That was the key message from today’s BusinessLDN economic insights briefing with the Bank, hosted by AlixPartners.
The three-way split on the Monetary Policy Committee’s (MPC) most recent rate decision underscores how finely balanced things are. Today’s briefing offered a glimpse into just some of the uncertainties that the MPC is currently navigating…
First, the impact of tariffs on the UK economy is complex. The effects go beyond bilateral relationships and touch third-party countries, with some trade flows being re-routed. All this makes for a murky outlook for inflationary pressures.
Second, there’s both good and bad news on inflation. Energy costs have fallen significantly since the start of the year. But that’s offset, in part, by regulated price rises that continue to push inflation higher.
Third, the Bank is weighing up alternative scenarios on both sides of the inflation ledger. A world in which tariffs and cost pressures suppress demand would be deflationary and prompt sharper rate cuts. Conversely, inflation could prove stickier, with recent inflation expectation surveys showing a slight uptick.
Fourth, there’s a bunch of stuff going on with the labour market. Firms are responding to the increase in national insurance contributions by seeking efficiencies and cutting costs, perhaps a bit more aggressively than they otherwise would in the face of tariffs and global uncertainty. Average earnings growth is slowing and the Bank expects it to reach around 4% by year-end. And there’s a noticeable uptick in firms substituting labour with capital.
On the labour market, we also got some great insights from Katie Johnston at PwC from their recent study on economic activity. Check out the details here. The good news is that there’s plenty firms can be doing to help turn the tide. The killer stat that a population the size of Leeds has left the labour market in the past six years should be enough to provoke some action.
As ever, the wise counsel from Lai at the Bank in the face of this flurry of economic news was to pay attention to the big picture and don’t get distracted by the noises off.
Thanks to Lai Wah Co at the Bank of England, to James Worsnip and colleagues at AlixPartners for hosting us, to Katie Johnston at PwC for her contributions and to BusinessLDN’s Muniya Barua for her expert chairing.