Good morning! We have some backlog sections from Mark to start us off today.
13:30: all done for the week, have a nice weekend!
Spreadsheet accompanying this report (last updated to: 23rd Jan 2025)
UK Rate Cut
The big economic news this week has been the reduction in interest rates from 4.75% to 4.5%, the third rate cut in six months, accompanied by dovish sentiment at the Bank of England where some members believed that an even bigger cut was in order.
Governor Andrew Bailey describes the cut as “good news” - the plight of borrowers is always of slightly greater concern than the needs of savers!
However, inflation is still above the 2% target. It only very briefly fell below it in September:
This is before the impact of higher NICs, which many predict will lead to a rise in consumer prices as businesses are forced to pass on higher costs to customers.
The Bank of England itself says that it expects inflation to rise to 3.7% this year, before falling again.
So with inflation already slightly higher than the Bank’s 2% target, and expected to rise further from here, it’s a brave move to pre-emptively cut rates. After all, the Bank’s primary mandate is price stability, and other objectives are supposed to be secondary. But they say there has been “sufficient progress” when it comes to reducing inflation, to allow them to cut rates - and there has indeed been remarkable progress on that front.
On the subject of price stability, the Bank is of the view that energy and utility prices will be the main driver of inflation in the short-term, and that “underlying domestic inflationary pressures are expected to wane further”. I hope they are right, but I’m concerned that the incoming tax changes could upend that prediction.
In the Bank’s defence, it is only a 0.25% cut, and they say they will be “careful” with next steps, not committing to further cuts.
All of this was expected. However, the news that caught the market by surprise yesterday was the discovery that two members of the Monetary Policy Committee wanted to take a more radical step and to cut Bank Rate by 0.5%.
