Government policies keeping UK interest rates higher for longer

FOR IMMEDIATE RELEASE

Government policies keeping UK interest rates higher for longer

Commenting on the Bank of England's decision to hold interest rates, Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said:

"The Bank of England’s decision to leave interest rates on hold today reflects badly on Government policy choices which have fuelled inflation.

"Fortunately, borrowers may not have to wait much longer. Andrew Bailey appears to have been the swing voter this week. The Governor sided with the majority in keeping rates on hold, but was the least hawkish, and it may not take much more evidence to prompt him to switch. A December rate cut is therefore still very much in play.

"UK interest rates have still been cut five times since last year’s General Election, but this has been part of a global trend. The European Central Bank has cut rates eight times since June 2024.

"The MPC had settled into a pattern of cutting rates every three months alongside each new set of economic forecasts. However, the acceleration in inflation since last October’s Budget has now broken this cycle.

"Most independent observers agree that Government policies have added to inflation, mainly via the pass-through of higher labour costs.

"It is widely accepted that the increases in employers' National Insurance contributions and in regulated prices, including energy bills and minimum wages, have kept UK inflation and interest rates higher for longer.

"Nonetheless, this month’s Budget offers an opportunity to reverse this trend. A credible plan to repair the public finances and improve productivity would reduce the Government’s cost of borrowing. It would also make it easier for the Bank of England to cut interest rates further, without crashing the economy."

ENDS

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Notes to Editors

• The IEA's Shadow Monetary Policy Committee (SMPC) voted to hold interest rates in its October meeting. The meeting minutes can be read here.
• The Shadow Monetary Policy Committee (SMPC) is a group of independent economists whose purpose is to monitor the decisions of the Bank of England’s official Monetary Policy Committee and make policy recommendations of its own.
• The SMPC has met once a quarter since July 1997 at the Institute of Economic Affairs (IEA). In those months where there is not a physical gathering, the SMPC conducts an email poll.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.

The Institute of Economic Affairs has no corporate view. The views expressed in all IEA publications represent those of the authors alone and not those of the Institute, its managing trustees, Academic Advisory Council members, or senior staff.

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