(VOR News) – Following last month’s drop in inflation to 1.7%, the Bank of England now has all the data needed to decide whether to reduce interest rates next month.
From 2.2% in August, the rate of price growth has sharply declined and is now much below the 2% objective set by the central bank. We have returned to the state we were in at the beginning of 2021, just before Russia invaded Ukraine and increased energy prices.
Low interest rates and inflation will soon boost Labour, which relieves Rachel Reeves.
This will help her finance the investments in this month’s budget by allowing her to borrow money without scaring the financial markets.
A decline in departmental spending may be predicted by the Office for Budget Responsibility (OBR) in conjunction with a decline in inflation. For example, the September inflation rate will decide the working-age benefit increase in April of the following year, saving billions on the welfare tab.
The OBR projects that the cost of servicing government debt will go down. It came to more than £100 billion in the fiscal year 2023–2024, or around 10% of all spending. This is because the Bank currently anticipates a quicker decline in borrowing costs.
In her budget for October 30, Reeves has the chance to raise long-term infrastructure expenditures while keeping actual spending on daily expenses same. This depends on the Treasury’s capacity to borrow money at a cheaper cost and the ability of Whitehall departments to set lower inflation-aware budgets.
This illustrates the significant influence that lowering inflation can have. Of course, the chancellor will still need to enact some big tax rises, but this might potentially be a part of a larger story that is far more positive about the UK than most analysts—including the Treasury—had previously thought.
A lot will depend on how the OBR evaluates the ensuing five years, as its March estimate cannot have altered significantly. It is therefore anticipated that significant revisions to the projected borrowing costs and inflation will be needed.
A forecast of borrowing costs needs to take the Bank of England’s response into consideration. Prior to the latest numbers being released, eighty percent of investors were certain that interest rates would be decreased by a quarter of a percentage point to 4.75% when policymakers met the following month.
Consequently, those odds have dropped to 90%, and as Bank governor Andrew Bailey told the Guardian earlier this month, there is an increasing possibility that rates may be further lowered in the coming year if inflation declines faster than expected.
The financial markets behaved as anticipated after the September inflation estimate was released. Because of sterling’s ongoing depreciation in currency markets.
The pound has fallen from $1.34 at the inflation end of last month to less than $1.30.
It is anticipated that a sizable portion of the nine members of the Bank’s monetary policy committee (MPC), which determines interest rates, will continue to harbor doubts regarding the likelihood of long-term price stability.
They will stress how the recent decline in inflation is a direct result of the recent decline in energy costs and their effects on sectors like transportation. According to data from the Office for National Statistics, the average cost of gasoline decreased by 5.5 pence per liter to 136.8p in September of 2024.
MPC members, who are frequently impacted by the falling cost of transportation, will be concerned about the continuous, notable increase in food expenses. The main measure of longer-term inflationary trends, the core inflation number, was revealed at a significantly higher rate of 3.2%. Food and energy are not included in this figure due to their considerable volatility.
However, sluggish wage growth indicates that borrowing costs need to be lowered as the economy is about to collapse. These days, Beijing’s economic policies have a greater influence on oil prices than wars in the Middle East.
Additionally, China, the biggest consumer of oil in the world, is currently going through a major slowdown as a result of the stunning collapse of the real estate bubble.
The US economy is expected to expand on the other side of the Atlantic. The situation in Ukraine and the waning demand from its primary export markets, China and the US, are adding to the already heavy load that the rest of Europe is already carrying.
Interest rates will probably decrease more quickly than first predicted since the MPC will evaluate changes in interest rates in light of the state of the world economy.
Reeves will voice his disapproval of the way the world economy is going. Her goal is to restore public finances while making up for more than a decade of improper public spending allocations during the Conservative administration.
SOURCE: TGN
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