The Institute of Economic Affairs, a right-leaning think tank, has called on the Bank of England to accelerate the pace of interest rate cuts, suggesting that potential tax hikes in the Budget may justify a larger half-point reduction.
Julian Jessop, an economics fellow at the institute, stated:
“Today’s better-than-expected inflation data adds to the mounting evidence that UK interest rates are much higher than necessary. The cooling labour market should also help alleviate concerns about service inflation.
While the September figures were boosted by fluctuations in transport costs and domestic energy bills are set to push inflation above the 2% target in October, inflation is still likely to be lower than the Bank of England’s forecasts.
The gradual impact of previous rate hikes and a sharp slowdown in money supply growth means that risks are tilted to the downside.
If the October Budget includes significant tax increases, it could tip the scales in favor of a half-point cut.” This would imply the Bank will reduce interest rates by 25 basis points at the November 7 meeting, followed by another 25 basis point cut on December 19.
Barclays’ Jack Meaning stated that the latest inflation data “strengthens our belief that the BOE will proceed with sequential 25 basis point cuts starting in November,” anticipating another cut in December and further reductions in the new year. Similarly, Deutsche Bank’s Sanjay Raja noted that “the case for sequential rate cuts is growing.”
However, Raja cautioned that the upcoming autumn Budget on October 30 is “likely to be expansionary despite the extent of fiscal consolidation,” and the MPC “will want to assess the full impact of fiscal policy, which could reduce the need for more aggressive rate cuts in the near term.”
