The Bank of England needs to keep moving with interest rate cuts

Rates were initially raised in response to global spikes in energy and commodity prices, which had nothing to do with workers and households.

It has been the TUC’s consistent view that rates have risen too high and have remained elevated for too long.

Faced with an intensification of an already severe and endless real pay crisis, keeping rates up when inflation is basically back at ‘target’ now risks making a bad policy worse.

Inflation

A year ago, the Bank expected inflation to come back to (the two per cent) target at the end of 2025.

Instead inflation came back to target in the third quarter of 2024.

The small rises of inflation into October and November don’t change this big picture.

Pay growth

Yesterday’s reporting about the good news of slightly higher pay growth in the private sector followed a similar pattern.

This time last year pay growth was expected by the Bank to be at 4¼ per cent at the end of 2024. Yesterday average earnings were a percentage point higher at 5.2 per cent.

So higher than expected pay growth has coexisted with lower than expected inflation.

As we have argued all along, higher pay growth has followed not caused higher inflation, the obvious lags in the system mean pay is still holding up.

Real pay in two thirds of industries is still below where it was at the start (2021Q1) of the cost of living crisis, and overall real pay is barely different to the position ahead of the global financial crisis. (And this is on the generous reading of CPI inflation.)

Services inflation

Many point at services inflation running at 5 per cent as also indicative of wage driven inflationary pressures that mean rates must remain higher for longer. These are the inflation rates for the highest few service items:

Hire of equipment and accessories for culture: 15.8

Postal services: 15.7

Travel insurance: 12

Health insurance and other insurance: 11.6

Cinemas, theatres, concerts: 9.7

Hospital services: 9.4

Sewerage collection: 9.1

The majority of these categories are unlikely to be driven by pay, nor are they best approached by rate increases. The first category translates to ‘TV rentals’ and ‘DVD rent/video on demand subscription servers’, which saw a massive hike at the start of 2024 and might be more related to the pressures on streaming services; what is left to say about sewerage and postal services?; ‘cinemas, theatres and concerts’ leapt from 3 per cent last month, attributed to “admission fees to live music events” (more down to the market power of certain acts?). The same is true for the most important category not listed: rentals – like mortgages, these are directly affected by rate increases and the associated costs are crushing many households.

The economy

The government inherited an economy that had been run down over 14 years, one that had looked after the wealthy but not the great majority of workers.

Growth is again grinding to a halt in the second half of 2024, on this occasion, in line with the Bank of England predictions made a year ago. According to the latest real time jobs data, there has been a reduction of 160,000 jobs in the private sector over the past year. Fortunately so far this has been compensated by increased public sector employment.

And while the new government is keeping its end of the bargain by expanding investment, the economy also needs households and workers to be spending and this means supporting wages and disposable incomes.

Accepting the pay review body recommendations for 2024-25 was a step in the right direction, and unions will be looking to constructive engagement for the 2025-26 process.

Likewise the higher private sector pay growth supports rather than undermines economic outcomes.

But the present trajectory still looks very worrying, and the key risks concern growth and employment not inflation.

Tomorrow the Bank needs to keep moving with interest rate cuts.