By James Sillars, business and economics reporter
We’re going to get an interest rate cut tomorrow.
That’s the good news – I have every confidence declaring ahead of the Bank of England revealing its decision at noon tomorrow.
It’ll be the third rate cut since the Bank’s monetary policy committee halted its cycle of hikes in August 2023 to combat the energy-driven cost of living crisis.
Just think about that for a second: August 2023.
That was the month when Wilko collapsed and Spain beat England in the final of the Women’s World Cup!
It feels a long time ago.
But inflation has been so sticky since then that the Bank has been unable to cut rates at the pace it would have liked.
And inflation continues to stalk the UK – the main measure is widely tipped by economists to rise back above 3% within months.
The Bank’s target rate is 2%.
So why cut the Bank rate now?
I could bamboozle you with a load of figures now, but instead I want to explain a likely shift in the Bank’s emphasis.
All its focus has been on tackling inflation, but the problem now is that the economy is flatlining.
It has been since July last year.
A rate cut gives the Bank more room for manoeuvre because it can be more confident that a lack of demand in the economy is unlikely to push price growth higher in the short to medium term.
Put another way – its focus is shifting from tackling inflation towards ensuring it can’t be blamed for holding back growth unnecessarily.
Economists widely expect the Bank to cut its growth forecasts tomorrow, too.
The outlook has darkened mainly as a result of a negative reaction from business to looming Budget tax hikes.
Trump trade tariff uncertainty is also proving a drag – hurting demand globally.
Financial markets and economists are currently pricing in three interest rate cuts by the Bank of England this year.
That’s not because inflation is under complete control, but due to the deterioration – at the same time – in the outlook for growth and employment.
The scenario is called “stagflation”.
Lower borrowing costs will help support growth and employment, partially offsetting at least the threatened budget backlash from firms who have widely warned of cuts to jobs and investment in response to April’s tax hikes.
With many key bills, such as those for energy, water and council tax all set to rise sharply at the same time, there are many balls in the air for the Bank to juggle in the months ahead.
