PM’s push to cut cost of living is threatened by rising inflation and higher government borrowing costs
Bank of England holds interest rates
Good luck to Andy Burnham convincing voters he is giving them “breathing space,” if the Bank of England ratchets up interest rates in the coming months.
That was the prospect opened up by Thursday’s minutes of the Bank’s monetary policy committee (MPC) meeting, which left rates unchanged at 3. 75% – for now – but suggested policymakers may be unlikely to hold out much longer.
“If the conflict in the Middle East persists for an extended period, as appears to be the case,” the Bank governor, Andrew Bailey warned. “It is likely that policy may have to tighten.”
With classic Bank understatement, Bailey warned that since hostilities heated up again, there had been, “a seeming loss of urgency to find solutions”.
When the new prime minister arrived in Downing Street in July, the war had abated, and the UK economy was puttering along nicely.
Since then, the resumption of the Iran conflict has pushed global oil prices back above $100 a barrel, with painful knock-on effects across Europe and Asia.
In the UK, inflation hit 3. 1% in August, driven by rising fuel prices. And even without a rate rise from the Bank, mortgage rates have already jumped, as markets contemplate a period of higher inflation. The MPC now expects inflation to be above 4% in the first quarter of 2027.
The minutes of the their meeting suggested a marked reluctance to raise rates for now. While energy prices have shot up, the jobs market remains weak, helping to contain the risks of the “second-round effects” that allow inflation to become embedded.
And the six:three vote for a hold was the same as at their last meeting in July, suggesting no rush to jump immediately. Yet there was also a growing sense of concern about the impact of soaring energy costs.
The widely expected hold decision leaves the Bank an outlier among leading central banks.
Kevin Warsh, chair of the US Federal Reserve, defied Trump’s urgent calls for rate cuts on Wednesday by increasing US borrowing costs for the first time since 2023 – a move that went down well in financial markets, but predictably infuriated the president. The ECB raised rates last week; the Bank of Japan is expected to follow on Friday.
Burnham kicked off his premiership with modest but tangible cost of living measures, such as capping bus fares and slashing VAT on electricity bills.
But he now faces a double whammy. Higher inflation and energy prices threaten to overwhelm the benefits of such handouts; but higher interest rates on government borrowing has increased the costs of future measures to protect consumers.
All this at a time when – as the MPC acknowledges – weather shocks are likely to push up food prices, and bond markets remain fragile.
The new prime minister has made clear that he expects to focus more on domestic affairs and less on striding the global stage than his beleaguered predecessor Keir Starmer.
But if – as currently seems likely – the Iran war goes on and on, the costs of global geopolitics will be felt at home regardless.