While there’s little doubt that higher rates are dampening the UK’s economy’s ability to grow, there is good reason for the Bank to be cautious. Having already been burned in recent years by failing to anticipate the inflation crisis, it must now take its own predictions seriously, which show inflation creeping back up by the end of the year, closer to 3pc on the year.
While this is nothing compared to the double-digit inflation post-pandemic, it’s nevertheless a move away from the Bank’s 2pc target, and one to watch.
But the much bigger concerns come from the external factors that no one at the Bank, or indeed in the UK, can control. The spike in oil prices this week saw both Brent crude futures and US West Texas Intermediate crude futures hit a one-month high, as the cost per barrel spiked by more than $3.50.
The risk of another energy price shock is not being taken lightly by Threadneedle Street. In the same interview, Bailey suggested that the escalation between Iran and Israel is considered to be “very serious” and is being watched “extremely closely” – which makes his comments on rates feel even more out of place.
The prospect of rates being kept higher for longer – especially in the face of such geopolitical uncertainty – is the last news Rachel Reeves will want going into her Budget, as she tries to scrape together the extra funds for Labour’s policy agenda.
It doesn’t help that an additional £10bn needs to be found for this year alone to make good on the inflation-busting pay raises promised to public sector workers – wage hikes being one of the warning signals the Bank looks out for in its decisions to hold or cut rates.
Like her predecessor Jeremy Hunt, Reeves has to divert close to £90bn to service the debt: in other words, paying for money that’s already been spent. In 2023/24, this sum was double the defence budget, with nothing new to show for it.