The Bank of England is likely to delay a cut in interest rates, says former Chancellor Lord Hammond.
The Tory peer believes members of the bank’s Monetary Policy Committee (MPC) will be concerned about pay rises well above its two per cent inflation target.
These worries, he added, would have been fuelled by new Chancellor Rachel Reeves announcing inflation-busting pay rises for millions of public sector workers, some of around five per cent.
The MPC is due to announce its decision at midday on Thursday, with the headline rate of inflation now down to two per cent, having peaked at around 11 per cent in October 2022.
“Although the headline rate of inflation now looks relatively stable at two per cent, services are still rising at quite an alarming rate,” Lord Hammond told Sky News.
“The cost of services...is being driven by wage increases that are way above the rate of inflation.”
He added: “The Bank of England will be worrying that these wage increases are going to feed back into a spiral that will start to push prices back up again.
“So, I think there is quite likely to be a majority on the MPC for waiting a little bit longer.”
He explained further: “Of course, Rachel Reeves this week has given a boost to those concerns by accepting public sector pay review body settlements in full.
“Which, never mind the rights and wrongs of it, is a boost to pay inflation in the UK and is likely to mean that pay settlements generally across the board move to a higher level.”
He also made clear that he disagreed with ex-PM Rishi Sunak’s decision to call a July election rather than wait until the autumn.
“I’m pretty sure that we will get rate cuts this year and therefore I have never quite understood why the previous Prime Minister decided to go early to the country when I think there would have been an increasingly good economic story,” he said.
“Rate cuts mean mortgage cuts for people and that matters to voters.”
Economists are split over whether the MPC will cut rates on Thursday, saying the decision is on a “knife-edge”.
The UK’s base rate has been held at 5.25 per cent since August last year as part of the central bank’s task to put a lid on unruly inflation.
But with inflation hitting the Bank’s two per ent target level for the past two months, hopes have been raised that rates can start to be reduced, easing the pressure on borrowers.
If so, it would mark the first time that UK rates have been cut since the onset of the Covid-19 pandemic in March 2020.
Andrew Goodwin, chief UK economist at Oxford Economics, said he thinks the MPC could hold rates at 5.25 per cent for another month.
This is partly because financial markets are leaning towards a September cut, and the Bank may want to avoid “surprising” investors.
“The MPC hasn’t gone against the market consensus since November 2021,” Mr Goodwin said.
“Though not completely beholden to markets, we think the MPC would prefer to take markets with them rather than take them by surprise, particularly if there is little urgency.”
Experts at Pantheon Macroeconomics agreed that policymakers will keep rates on hold in August but “signal they expect to cut rates in the coming months”.
“The swing voters - (BoE governor) Andrew Bailey, Clare Lombardelli and Sarah Breeden - have not spoken since the General Election, which could suggest they are not ready to take the plunge,” Pantheon’s economists said.
James Smith, developed market economist for ING, said it will be a “close call” but he expects a majority of policymakers to vote in favour of a 0.25 percentage point rate cut on Thursday.
He said services inflation, which looks only at service-related industries such as hospitality and culture, is the “guiding light for Bank of England policy right now”.
“More recently, services inflation has been propped up by a spike in hotel prices,” he said, suggesting that the Bank could be less concerned by the “highly volatile” nature of the data.
“The bottom line is that there is just about enough in the recent data to give the Bank confidence to begin lowering rates,” Mr Smith concluded.
Sanjay Raja, senior economist for Deutsche Bank, also predicted that rates will be cut to five per cent but stressed it will be a “delicate balance”.
“With the bank rate held steady for the better part of a year now, risk management considerations may be shifting from having done ‘too little’ to ‘too much’,” he said.
