Bank of England must cut rates quicker to stem trade war fears
It would mark the fourth cut since policymakers started to ease the brakes in August 2024 and maintain the pattern of lowering rates at a pace of once per quarter at meetings when the bank publishes its Monetary Policy Report and the governor hosts a press conference.
So far, the Bank has kept rates unchanged at interim meetings – including at the last one in March.
The critical question for Thursday is not whether the Bank will cut, but whether it will have the courage to signal that it plans to accelerate future cuts as a precautionary measure against rising growth risks.
At the start of the year, economic logic argued for the Bank to stay in the slow lane. Growth momentum seemed to be picking up, and the UK had not fully gotten over the bitter inflation shock of 2022 and 2023.
And even though the Bank had expected inflation to return close to its 2pc target within two years, inflation looked likely to jump above 3pc for a period this year because of a temporary rise in energy prices. Plus, the combination of weak productivity growth and elevated wage pressures tilted inflation risks a little to the upside over the medium term.
That was then. Now, the situation has changed, and the danger is that policymakers get caught offside worrying too much about the last shock instead of the current one.
To its credit, the Labour Government has reacted to US tariffs by avoiding retaliatory measures and instead by temporarily cutting tariffs across a range of imports. Thanks to such action, as well as broader global developments, trade wars are likely to be a disinflationary shock for the UK.
A diversion of cheap Chinese goods into Europe, lower global commodity and energy prices reflecting weaker global demand, and lower import prices thanks to sterling's steady appreciation will help to keep a lid on price pressures. Furthermore, the fear factor coming from increased uncertainty may even dampen wage and price setting – softening underlying inflationary pressures.
Judging by these fundamentals, the Bank should be safe to move a bit more quickly with rate cuts from now on.
Ideally, policymakers should complement a likely cut on Thursday with a strong signal that they intend to reduce rates further in each of the remaining five meetings for the year. That would take the Bank Rate to 3pc by year-end instead of 3.75pc – which is where it would end up if policymakers keep the pace of cuts unchanged.
Judging by the near-textbook response of the economy to the rise in the Bank Rate from 0.1pc in December 2021 to 5.25pc in August 2023, cuts of 1.5 percentage points rather than 0.75 percentage points could radically improve the outlook.
Fears of a recession or even financial crisis, which had been widespread at the start of the tightening cycle, proved far overblown.
Instead, slowing demand – linked to softer credit and real estate momentum – helped to curb earlier inflation and wage excesses. Initial worries about what would happen if the Bank slammed the brakes hard, as it did, overlooked the fact that the financial health of the private sector is robust.
Household credit and mortgages versus incomes are at 30 and 20-year lows, respectively, and the household saving rate sits at a lofty 12pc. Corporates' debt is at a near-30-year low versus GDP while their cash balances are worth some 20pc of GDP. Banks are well capitalised.
More aggressive easing would help to turn these buffers against shocks into springboards for growth. Importantly, it would stimulate domestic-oriented services and consumer sectors as well as housing – offsetting the external drag.
Yes, government finances are a mess, but the private sector has the capacity to leverage up and spend. The problem is that, after years of unusual and repeated shocks, businesses and households find themselves in a state of near-chronic pessimism.
Paradoxically, the fear of tough times ahead risks becoming self-fulfilling again if the response by companies and consumers is to tighten up.
The major problem with monetary policy is that it is a blunt tool. But when people need a big nudge to go out and spend, invest, and borrow, it is the right instrument for the job.
The question now is not whether the Bank has the power to change the narrative, but whether it will use it.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Daily Mail
an hour ago
- Daily Mail
You can say that again! Rachel Reeves admits Labour has left voters 'disappointed'
Rachel Reeves has admitted that the Labour Government has 'disappointed' people. But the Chancellor insisted she had got the balance right between tax, spending and borrowing. She told an audience at the Edinburgh Fringe Festival that her job involved making tough decisions, even if they are unpopular. She told the Iain Dale All Talk Show: 'The reason people voted Labour at the last election is they want to change and they were unhappy with the way that the country was being governed. 'I'm impatient for change as well, but I've also got the job of making sure the sums always add up. You certainly can't do everything straight away, all at once.' Ms Reeves pointed to Labour's £200million investment in carbon capture in Scotland, which she said was welcomed by the energy industry. Rachel Reeves (pictured) has admitted that the Labour Government has 'disappointed' people. But the Chancellor insisted she had got the balance right between tax, spending and borrowing Reeves told the Iain Dale All Talk Show: 'The reason people voted Labour at the last election is they want to change and they were unhappy with the way that the country was being governed. Defending Labour's record, she said her party had the 'balance about right' At the same time, Labour's windfall tax, she said, was not liked by the sector. 'But you can't really have one without the other,' she said. Defending Labour's record, she said her party had the 'balance about right'. 'But of course you're going to disappoint people,' she added. 'No one wants to pay more taxes. Everyone wants more money than public spending – and borrowing is not a free option, because you've got to pay for it. 'I think people know those sort of constraints, but no one really likes them and I'm the one that has to sort the sums up.'
Scotsman
16 hours ago
- Scotsman
Why Labour's Ed Miliband is moving too quickly towards end of North Sea oil and gas
Sign up to our daily newsletter – Regular news stories and round-ups from around Scotland direct to your inbox Sign up Thank you for signing up! Did you know with a Digital Subscription to The Scotsman, you can get unlimited access to the website including our premium content, as well as benefiting from fewer ads, loyalty rewards and much more. Learn More Sorry, there seem to be some issues. Please try again later. Submitting... In the days before he was Secretary of State for Energy, Ed Miliband once described me to a group of people as his 'lift buddy'. As his office was then directly above mine, it was where we bumped into each other. Our conversations were generally about energy, and while we agreed on the need for change, we tended to differ on how, and how quickly. For me, energy security and employment, never mind keeping the lights on, are key. Advertisement Hide Ad Advertisement Hide Ad I think it's fair to describe the Energy Secretary as favouring a speedier end to all oil production. In recent days, the topic has begun to dominate the airwaves as golf course entrepreneur and US President Donald Trump, and then environment charities, threw scorn on developments of offshore wind farms. Unlikely bedfellows, and although their reasons are very different, they reflect a growing unease. READ MORE: Chancellor Rachel Reeves defends windfall tax on oil and gas giants on visit to Scotland Ed Miliband tours Balltech Engineering Solutions, which specialises in offshore wind as well as oil and gas engineering, in Morecambe (Picture: Christopher Furlong) | Getty Images For Trump there is the dual scourge of spoiling the view from his controversial golf developments on a previous Site of Special Scientific Interest on the Aberdeenshire coast, and going against his 'drill baby drill' philosophy. For his former environmental opponents, it is about protecting wildlife. While I have a lot of sympathy with the latter, I also agree with those pointing to the irony of our growing dependence on gas imports rather than using our own. Advertisement Hide Ad Advertisement Hide Ad Add that to the concerns that Chinese involvement in, and control of, windfarm facilities might threaten our energy security and it seems the future picture is far from universally agreed. Oil and gas supporters have long warned that premature shutdown of the North Sea would mean importing carbon fuels from countries with fewer safeguards and damaging our carbon footprint in the process. This week their argument has been given fresh impetus as government figures show UK gas imports grew by 20 per cent between January and March this year. With damaging price increases caused by our dependence on Russian gas supplies at the outbreak of war in Ukraine still fresh in the public memory, reliance on any foreign source feels risky and even unnecessary. Advertisement Hide Ad Advertisement Hide Ad Will this autumn's Budget signal a change of direction from Downing Street? The Climate Change Committee has estimated that between 13 and 15 billion barrels of oil and gas could still be needed while we work towards net zero. Experts reckon that our domestic production could only fulfil about one third of that. If it could be doubled, it would not only reduce our foreign dependence, but industry lobby group Offshore Energy UK claim it could raise more than £160 billion of useful revenue. There is no simple or cheap solution. Shutting down the North Sea now might seem on the surface like the best way to ensure net zero, but it brings a host of other obstacles to overcome. Conversely, continuing to depend too heavily on a naturally declining basin would not only delay net zero but wouldn't guarantee cheaper energy. Getting the balance right will be the key and right now I am not sure that we have it right, either to protect the climate or help the Exchequer stabilise our economy and create growth. Once the UK Parliament returns, I will be looking to my lift buddy to navigate the best route forward.
Times
a day ago
- Times
Mortgage prices are falling – should you fix?
A fresh mortgage price war has come to the rescue of hundreds of thousands of borrowers whose cheap pandemic home loans are about to expire. More than 760,000 homeowners' fixed-rate deals are due to come to an end this year. And many of those will be braced for crippling rises of up to £300 a month when they come off loans with interest rates as low as 1 per cent. However, lenders are slashing rates this summer as they compete for business in a 'buyer's market', with a record number of properties for sale. This slowdown in the housing market has caused banks to focus on deals for those who are remortgaging. Figures released by the Bank of England this week showed that the 41,800 remortgages approved last month was the most since October 2022, just after Liz Truss's disastrous mini-budget, which sent mortgage rates soaring. On Wednesday the building society Nationwide became the latest lender to cut rates, slashing fixed deals by up to 0.21 percentage points. Shaun Sturgess, a mortgage broker based in Swansea, said: 'For many this is the first window of opportunity in over two years to secure a competitive fixed rate below 4 per cent.' The Bank of England is also expected to cut its base rate to 4 per cent on Thursday after weak growth and a rise in unemployment. This would drive down mortgage costs for the millions of borrowers with tracker or variable-rate deals. The lowest five-year fixed rate available at up to 60 per cent loan-to-value has been cut from 3.96 per cent at the start of May to 3.86 per cent on Thursday from HSBC, while the lowest five-year fix for someone buying a home has stayed the same at 3.88 per cent, available from NatWest. The lowest two-year fix is 3.8 per cent from Santander for someone remortgaging, down from 3.96 per cent at the start of May. While the lowest two-year fix for a buyer is lower, at 3.73 per cent from the same lender, it has been cut by slightly less — down from 3.88 per cent. Some 222,480 homeowners took out five-year fixes between the start of August and the end of December 2020, according to the trade association UK Finance, when the Bank of England base rate was at an all-time low of 0.1 per cent (it is now 4.25 per cent) and fixed mortgage rates could be had for well below 2 per cent. Many took advantage of low pandemic-era interest rates to move to bigger homes, or remortgaged to make home improvements. Between January and August 2020 the average mortgage amount rose from £174,671 to £193,992. Rates then soared after the Bank of England increased the base rate 14 times between December 2021 and August 2023, to a peak of 5.25 per cent, in a bid to tame high inflation. The average mortgage rate hit a peak of 5.74 per cent in July 2023, according to the Bank of England. Five years ago the lowest rate was 1.4 per cent. Someone with a £200,000 25-year mortgage would pay £791 a month, which would rise to £1,056 at a rate of 4 per cent. At a rate of 3.8 per cent, repayments would be slightly lower at £1,034 a month — £264 less a year. Peter Gettins from the broker L&C said: 'Whether you call it a rate war or rate skirmish, banks are keen to compete for your business and are pricing as aggressively as they possibly can. That can only be good news for anyone looking to remortgage or buy.' Borrowers could opt for a tracker deal with a rate that rises and falls in line with the Bank rate. Nationwide's tracker is 0.19 percentage points above Bank rate for two years with no early repayment charge. The mortgage broker Adrian Anderson expects the price war to continue. He said: 'A lot of the banks are fighting for market share. Many will be behind their annual targets because purchase transactions are down, so they will want to try and entice people to take a mortgage with them and increase their loan book.' Aneisha Beveridge from the estate agency Hamptons believes that more competitive rates are increasing affordability for buyers, which will drive house price growth. She said: 'After a sluggish 2024 we expect average house prices across Great Britain to rise 3 per cent year-on-year in the last quarter of 2025, reaching about £277,000.' The average detached house sold for £441,439 in May, according to the Land Registry. A 3 per cent rise in prices would take it to £454,682. • Will you bag a 3% interest rate in the summer mortgage sale? Beveridge added: 'Falling mortgage rates, weakening inflation and rising wages have all helped to ease pressure on household budgets.' Historically, dramatic falls in the Bank's base rate have helped to fuel house price booms, with the 2008 financial crisis and the coronavirus pandemic leading to spikes. The base rate is expected to fall to at least 3.75 per cent before the end of the year. Beveridge said: 'Much of this is already priced in. However, competitive lending — especially for higher loan-to-value products where lending requirements have loosened — should support first-time buyers and second-steppers.' Latest figures from the property website Rightmove put the average rate for a two-year fix at 4.52 per cent, which is 0.74 percentage points lower than the same time last year. The average five-year fix is 4.51 per cent, down 0.36 percentage points compared with June 2024. House prices could also be boosted by high street banks easing the 'stress tests' that are used to make sure borrowers can still afford repayments if their mortgage rate rose. Forecasts by the analyst Oxford Economics predict that the average two-year fixed-rate mortgage with a loan-to-value of 75 per cent could drop from June's 4.32 per cent figure to 4.17 per cent by the end of the year. By July next year it expects this to fall to 4.02 per cent. These falls will support house price growth, with Oxford Economics expecting house prices to hit 3.6 per cent year-on-year growth in the third quarter of the year, and then 2.5 per cent in the final quarter. Edward Allenby from Oxford Economics said: 'We expect house prices to grow, but that growth is expected to soften over the next year. That is because household income growth is likely to slow, whether that is through higher inflation, tighter fiscal policy, frozen thresholds and potentially higher taxes.' In the first quarter of 2025 year-on-year house price growth was 5.5 per cent. An oversupply of homes could also cause price growth to slow. Zoopla reported this week that there were about 553,000 homes up for sale, a record high. • House price boom? Inflation means all is not as it seems Richard Donnell from Zoopla said: 'Price growth is being stunted by the high supply of homes for sale, with 12 per cent more properties on the market than this time last year. 'This supports a 'buyers' market' where there's plenty of choice and offers can be competitive, limiting house price increases.' For homeowners coming to the end of their mortgage term, it looks like a good time to shop around, with significant rate drops for those who want to switch lenders. Gettins said: 'In the last 6 to 12 months the gaps between rates for first-time buyers and those remortgaging have narrowed. Banks are becoming more competitive for those remortgaging as they are for movers, and that's a positive sign for anyone whose deal is maturing.' Analysis by L&C has found that the lowest remortgage rate for a two-year fix is 3.79 per cent, a fall of 0.17 percentage points since the start of May. This has nearly matched the rate for buyers, with the lowest two-year fixed mortgage rate at 3.76 per cent, which is 0.22 percentage points lower than the May equivalent. Experts have said that the high number of people remortgaging is driven by the better rates but also a 'perfect storm' of people coming off their two and five-year mortgages at the same time. Chris Sykes from the mortgage broker MSP Financial Solutions said: 'There have been a series of events that have led to a big remortgage year. 'You probably fixed at five years in Covid before rates rose, and then those getting mortgages two years ago when rates went really high after the Truss budget would have fixed for two years hoping rates would come down.'
