BoE's course "clear" to cut rates next year after Autumn Statement

(Alliance News) - The course is now "clear" for the Bank of England's Monetary Policy Committee to cut bank rate next year, according to Pantheon Macroeconomics, citing "no major pre-election giveaways" in UK Chancellor Jeremy Hunt's Autumn Statement on Wednesday.

Hunt's speech on Wednesday, delivered with an eye on a general election expected next year, promised a package of measures to boost growth and cut taxes in a highly political autumn statement.

He said his plan will "raise business investment, get more people into work, reduce inflation" and increase the size of the economy.

Hunt said that universal credit and other benefits will increase by 6.7%, in line with September's inflation figure, ending speculation the UK government could have used the cheaper October figure.

Hunt also confirmed the triple-lock formula for state pension rises would be implemented as usual, meaning the state pension will rise by 8.5% in line with average earnings, worth up to GBP900 more a year.

But Pantheon Macroeconomics analyst Samuel Tombs said fiscal policy "remains set to dampen" gross domestic growth in 2024, despite the announced tax cuts. This would boost the case to cut interest rates.

Pantheon cited the Office for National Statistics, who estimated that cyclically-adjusted primary surplus of 0.3% of GDP will be run in 2024/25, compared to a deficit of 1.3% in 2023/24.

"This 1.6pp-of-GDP consolidation is much bigger than this year's 0.7pp squeeze, and almost identical to that planned in March," Tombs explained.

Pantheon said that the "standout" tax measure - to reduce the main rate of employees' national insurance contributions to 10% from 12% from January 6 - will boost households' disposable incomes by "just GBP8.7 billion or 0.5% in 2024/25.

"Accordingly, the chancellor's policy announcements today will do little to alter the MPC's forecasts for the economy or the timing of the first reduction in bank rate, which we still expect to occur in May," said Tombs.

"Note too that the OBR thinks that changes to income taxes have a first-year fiscal multiplier of just 0.33, because many people that benefit will save the extra money and spend some of it on imported goods, so the tax cut will boost GDP by just 0.16%. Overall, the OBR judges that the Autumn Statement policy measures boost aggregate demand relative to supply by 0.1% at their peak impact in 2025/26."

Earlier this month, the BoE maintained UK interest rates at a 15-year high of 5.25%, a second-consecutive hold following one in September and ending a streak of 14 successive hikes since December 2021. The BoE had rapidly shot up the bank rate from a Covid-19-induced low of 0.10%.

UK consumer price inflation cooled dramatically in October, according to ONS data on Wednesday last week. Consumer prices rose 4.6% annually in October, dropping sharply from the 6.7% pace in September. The reading was lower market consensus of 4.8%, as cited by FXStreet, which was also the forecast from the Bank of England.

By Greg Rosenvinge, Alliance News senior reporter

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