7th Nov 2024 15:49
(Alliance News) - Bank of England Governor Andrew Bailey said it is too early to determine what impact Donald Trump's US re-election will have on the UK, and the central bank is in wait-and-see mode as far as the impact from last week's budget goes.
The fiscal announcement and path of US trade policy were key talking points as Bailey fielded questions from reporters after the Bank of England announced it cut rates by 25 basis points.
On the budget, Bailey said the BoE "will need to see more" to assess how it affects inflation. Its decision statement suggests the BoE believes the budget will have an inflationary impact.
The budget is expected to boost the level of gross domestic product by around 0.8% at peak, compared to August projections.
"The budget is provisionally expected to boost CPI inflation by just under 0.5 of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the budget measures," the central bank added.
Reeves used October's financial statement to confirm an increase to employer national insurance contributions, changes to inheritance tax rules for farmers and a rise in the minimum wage.
Taxes were raised to a historic high, with GBP40 billion extra a year in revenue used to pour into schools, the NHS, transport and housing.
Bailey said on Thursday: "There are different ways in which the increase in employer national insurance contributions could play out in the economy. It represents an increase in the cost of employment. There are at least four margins of adjustment. Firms could pass on higher costs to consumer prices, or firms could absorb the increase through lower margins or higher productivity; firms could increase wages by less, or firms could respond by reducing employment. Let me be clear, public policy measures of this kind serve other objectives and it is not for us to opine one way or the other. What we must do is respond to any consequences for inflation in order to meet our 2% target over the medium term. We will get information on how the consequences for inflation evolve over time."
In a widely expected move, the BoE's Monetary Policy Committee voted decisively by 8 to 1 to lower rates to 4.75%, having cut borrowing costs for the first time in four years in August before leaving them unchanged in September.
Catherine Mann was the lone dissenting voice on the MPC, preferring to maintain bank rate at 5.0%.
Looking ahead, the BoE said a "gradual" approach to removing policy restraint remains appropriate, noting "significant uncertainty" around the labour market and a range of future paths for inflation.
"We need to ensure inflation stays low. So we will not cut interest rates too quickly or too much," the BoE said. "If things evolve as expected, it's likely that interest rates will continue to fall gradually."
The rate of inflation in the UK eased to 1.7% in September, from 2.2% in August. The BoE expects inflation to pick-up in months to come, however, as energy price falls come out of the equation.
In its latest set of projections, the BoE lowered its inflation forecast for the fourth-quarter of this year, but pushed up expectations for future periods. It now expects an inflation rate for the end of this quarter of 2.4%, its forecast cut from 2.7% in the August monetary poloicy report. The 2025 projection was lifted to 2.7% from 2.2%, and 2026 was lifted to 2.2% from 1.6%. In the fourth-quarter of 2027, a slowdown to 1.8% is predicted.
It expects inflation to return to below the 2% target in the second-quarter of 2027. This contrasts with August, when it predicted an inflation rate returning below the target in the second-quarter of 2026.
Also in focus was any giveaways on how the BoE sees a Trump administration affecting the UK.
But the BoE is not making "presumptions" about policy.
"We always respond to announced policies... not stories on what they might be," Bailey said.
"We work with all US administrations, more obviously on the financial stability side than the monetary policy side," he continued.
"We will look forward to working with the new US administration. We worked with the previous Trump administration, we worked with the current administration and we do it without any presumptions, and we will do that constructively."
The pound pushed higher following the decision and press conference, topping the USD1.30 mark, having sat at USD1.29 beforehand.
By Eric Cunha, Alliance News news editor
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