Professor Joe Nellis, of Cranfield University and economic adviser to accountancy firm MHA, gives his verdict on the Bank of England’s decision this week to hold interest rates at 5%.
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THE DECISION by the Monetary Policy Committee is no surprise, as headline inflation remains above the Bank of England’s 2% target and core and services inflation have remained stubbornly high as figures revealed this week.
However, we can still expect to see a cut in November as the BoE treads the delicate balance between economic growth and inflationary stability. The news from the US last night (Wednesday), with the Fed cutting by 50 basis points, will also add weight to calls for action.
Although an Autumn reduction is still the most likely outcome, the fact that the MPC held rates highlights a significant disparity between the economic landscapes of the UK and the Eurozone, where last week the European Central Bank cut interest rates for a second time since June.
While headline inflation in the Eurozone and UK is running side by side at 2.2%, UK interest rates are significantly higher than the 3.5% imposed by the ECB and at 5% remain the highest in the G7.
Despite this difference, we are unlikely to see UK interest rates move towards an alignment with those of the Eurozone.
The European Single Market, combined with the single currency of the Euro, creates a competitive environment which presses down on domestic causes of inflation, allowing the ECB to commit to lower rates of interest.
By contrast, since leaving the EU, the UK has faced labour shortages across many sectors, sparking domestic wage-push inflationary pressures. These factors combine to make the BoE’s battle against inflation tougher from the outset and less willing to pursue an aggressive interest rate-cutting agenda.
Joe Nellis is Professor of Global Economy at Cranfield University and Deputy Dean of Cranfield School of Management.
He is also economic adviser to chartered accountants MHA. He received a CBE in the King’s 2024 New Year’s Honours list.
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