According to Bank of England governor Andrew Bailey, the reaction from businesses to the budget is the primary concern, alongside the uncertainty of both domestic and global factors, such as the return of Donald Trump to the White House. Bailey addressed these issues at the Financial Times’ Global Boardroom event just before the upcoming interest rate decision by the Bank.
The Bank is cautious about the possibility of a third interest rate cut this year due to rising inflation rates exceeding the 2% target. Forecasts indicate further inflation increases in the coming months, primarily driven by energy and services costs.
Another concern for the Bank is the impact of wage growth on inflation levels, as it could lead to increased demand in the economy. The recent hike in employer National Insurance contributions is also under scrutiny, with Bailey highlighting the importance of companies balancing factors like prices, wages, and employment levels following the budget announcement.
Businesses have expressed concerns about the budget changes affecting wage settlements, investments, and jobs, potentially leading to cost increases being passed on to customers, further fuelling inflation. Sectors like retail and hospitality anticipate significant financial burdens from these changes.
While reducing pay settlements could help lower borrowing costs through interest rate cuts, policymakers are cautious of the potential impact on consumer prices. Bailey mentioned that the Bank is analyzing various economic scenarios that could result in higher or lower inflation levels.
Moreover, Bailey discussed the potential global impact of Trump’s return to the White House, particularly regarding threatened trade policies and their implications on the UK economy. He emphasized the uncertainty surrounding these policies and their effects on trading prices and exchange rates.
Despite uncertainties, Bailey did not rule out the possibility of further interest rate cuts next year, with financial markets anticipating multiple cuts. He noted that the decline in inflation is a significant trend that is firmly established.
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Bailey also highlighted the potential global impact of the upcoming Trump presidency, especially concerning trade policies and their effects on the UK economy. The Bank is closely monitoring these developments and their potential implications.
In an interview with the Financial Times, Bailey acknowledged the possibility of further interest rate cuts in the future, with up to four cuts anticipated by financial markets unless unexpected events occur. He emphasized the ongoing trend of decreasing inflation levels.