Brutal blow for Rachel Reeves as BoE refuses to cut interest rates – Budget hell now looms
The Bank of England has frozen interest rates at 4% today.
Chancellor Rachel Reeves can’t blame the Bank of England, today’s rate freeze is her fault (Image: Getty)
And that’s more terrible news for Rachel Reeves but hold your sympathy. She has only herself to blame after a hapless string of policy errors.
Today, she was hoping the BoE might ride to her rescue with another 0.25% cut, reducing bank rate from 4% to 3.75%. That would have been the sixth cut since last August.
Across the Atlantic, the US Federal Reserve bowed to pressure and lowered its benchmark rate yesterday. Reeves must have dreamed the BoE’s rate-setting monetary policy committee (MPC) would follow suit. Fat chance.
At last month’s meeting, the MPC pushed through a 0.25% cut by a wafer-thin 5-4 vote. With UK inflation climbing, it was a controversial decision.
There was no big controversy today, and no split. The MPC voted by a majority of 7–2 to maintain bank rate at 4%.
With inflation way above target at 3.8% in August, and expected to hit 4% in September, the MPC had no choice. So who’s to blame?
Step forward Rachel Reeves and her inflation-fuelling partner in crime, energy secretary Ed Miliband.
Their policies have driven UK inflation far higher than in the rest of the developed world. Last year, in her disastrous Budget, Reeves hiked employers’ national insurance bills by a thumping £25billion. Businesses passed the costs straight on to consumers, exactly as Reeves had been warned.
An inflation-busting 6.7% minimum wage hike made things worse. Food prices are climbing fastest of all at 5.1%, as supermarkets, pubs and restaurants pass on extra staffing costs.
Households are also footing the bill for Miliband’s net zero drive, with subsidies and grid upgrades adding to energy bills, as he drives through his green crusade at reckless speed.
Ofgem’s energy price cap will climb to £1,755 on October 1 and jump again on April 1 to £1,823, according to Cornwall Insight. Even as wholesale gas prices fall.
Today’s high inflation is down to Labour. So is today’s interest rate freeze.
It’s a different story in the eurozone, where inflation plunged to just 2% months ago. That’s allowed the European Central Bank to cut its main interest rate to a meagre 2.15%.
Imagine if our borrowing costs were that low. It would save businesses and households billions, which they could pump into the economy. Alas, it’s not to be.
Higher borrowing costs aren’t just a disaster for Reeves, but hell on wheels for the rest of us.
An interest rate cut would have lowered gilt yields, saving billions in servicing Britain’s £2.9trillion national debt and giving Reeves a little breathing space.
Now she’ll have to balance the books by hiking taxes in her Budget on November 26. That will only accelerate the UK’s economic doom loop.
It gets worse. Today’s minutes show the MPC will continue its “gradual and careful approach” to rate cuts. As BoE governor Andrew Bailey warned: “We’re not out of the woods yet.”
Reeves doesn’t have time for that. She needs help now. Her only solace today is that the BoE may slow down the reduction of its gilt portfolio, which could shrink yields a little.
Having made a mess of the economy, Reeves will now seek relief elsewhere. The Fed is her best hope, signalling two further rate cuts this year. That could bring down UK yields on UK gilts too.
Desperate Reeves is now relying on other countries to bail her out, a stark reminder of the mess she has made. November’s Budget was always going to be a nightmare. Today, it got even worse.
