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 | Yorkshire Times A Voice of the Free Press |
9:05 AM 16th October 2024
business
Bank Of England Should Step Up The Pace Of Rate Cuts
Image by aymane jdidi from Pixabay
"Today’s better than expected inflation data add to the growing evidence that UK interest rates are far higher than they need to be. The cooling in the labour market should also ease fears about services inflation.
"Admittedly, the September numbers were flattered by swings in transport costs. The rise in domestic energy bills also still means that inflation will jump above the 2% target again in October.
"Nonetheless, inflation is set to be lower than the Bank of England had been forecasting. The gradual pass through of previous interest rate rises and the rapid slowdown in the growth of the money supply mean that the risks will remain on the downside.
"The Bank should therefore reduce rates by at least a quarter point at the November MPC meeting. Indeed, a large package of tax rises in the October Budget could tip the balance towards a half point cut."
“Today’s decline in inflation follows hot on the heels of yesterday’s softer labour market data, and helps smooth the path to the next rate cut. Private sector regular wage growth is now below 5%, vacancies are close to pre-pandemic levels and PAYE data suggests employment is weakening – all of which point toward diminishing inflationary pressure. But, there is still inflationary pressure out there. Inflation is set to rise next month as the 10% rise in the Ofgem price cap comes into effect, oil prices are volatile, public sector pay settlements will contribute to stickiness in wage growth and the Bank will need to assess the inflationary impact of the Budget. How these different factors play out will ultimately define the pace of interest rate cuts.
“This Budget has a lot of boxes to tick. With inflation back at target, the public finances need to be stabilised without undermining investment and employment incentives. And business and market confidence must be secured to underpin the investment needed to lift the economy and public finances. It is vital that short-term pressure to plug the deficit does not lead to decisions that conflict with the urgent need to grow the economy. The business tax roadmap will be a useful communication tool as well as an important part of the plan to deliver clarity and stability for business.”
“While the news of UK inflation dropping below the 2% target for the first time in over three years is encouraging, the broader national sentiment is one of sluggish frustration with investments stagnant and as if hands were being sat on. The anticipation surrounding the upcoming Autumn Statement is palpable, as many hope it will provide the necessary clarity and direction for businesses. Now is a critical time for UK businesses to reassess their lending strategies, enhancing both financial stability and resilience in preparation for potential economic and policy changes. Recent research from Manx Financial Group sheds light on the ongoing struggles faced by SMEs: nearly a third have had to pause or scale back operations due to financial constraints in recent years. While this is an improvement from the 40% in 2023, one in ten SMEs seeking external finance have been unable to secure it.
“SMEs are vital to our economy, driving job creation and innovation, yet persistent pressures, including geopolitical conflicts, a tightening labour market, and cost-of-living challenges, continue to threaten their growth. The new Government must use the Autumn Statement to foster an environment where SMEs can thrive, leveraging both traditional and alternative lenders. Imposing higher taxes or inadequate financial support risks undermining growth and economic recovery.”
“Inflation dropping noticeably below the Bank of England’s target in September will come as good news to households. While headline inflation is still set to tick up in the latter part of this year, these latest data will reassure members of the Monetary Policy Committee that price pressures are easing.
“Below-target inflation in September makes it increasingly likely that the MPC will choose to cut rates in November. However, some members of the MPC will remain wary of the upside risk that sticky services inflation poses to the outlook. Therefore, we still expect to see a gradual path for interest rate cuts in the near term.”