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LONDON — The Bank of England just made things awkward for Britain’s new Chancellor Rachel Reeves.
The U.K. central bank cut the Bank Rate by 0.25 of a percentage point to 5 percent, the first cut since 2020.
But while Brits may cheer the prospect of mortgage payments starting to come down, it’s an awkward one for the U.K.’s brand new finance minister who is busy sounding doomy about the economy she inherited from her Conservative predecessors.
“While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget,” Reeves said after the decision, in a swipe at the central economic pitch of former Conservative Prime Minister Liz Truss.
“That is why this government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off,” she added.
The tepid response to the interest-rate cut comes as the U.K.’s new finance minister seeks to blame the Tories for the country’s broken finances.
Reeves has spent all week pushing a message that there may need to be tax rises to close a £22 billion black hole in Treasury coffers — created by economic mismanagement by the previous Conservative government that’s left the newly-elected Labour Party with a mess to sort out.
But the U.K.’s first rate cut since 2020 jars with that rhetoric.
And the Conservatives were quick to claim credit that, in fact, they left Labour with an economy on the up.
“Today’s cut will be welcome news for millions of homeowners and shows that Labour inherited a stronger economy which was on the right track,” crowed Shadow Chancellor Jeremy Hunt, attacking Reeves for agreeing to new public sector pay rises.
“In government, we took difficult decisions that cut inflation from 11.1 per cent to the Bank’s target 2.0 per cent paving the way for lower rates.”
The Tories tried to make an improving economy a vote winner in the U.K.’s snap July election, after inflation fell back down to the Bank of England’s 2 percent target.
But voters still feeling the pinch in their wallets severely punished the party at the polls after 14 years in power.
Good or bad inheritance
Now it is in government, Reeves’ main attack line is that the former government massively overspent. She’s swiped at a failure to allocate sufficient resources to meet investment commitments and demands on public services.
Reeves claims the Conservatives blew the asylum budget by £6.5 billion, that bailing out rail services cost £1.6 billion, and blamed the Tories’ inability to do a pay deal with striking public sector workers for a £9.4 billion pay rise she brokered — a sum that made up almost half of the alleged overspend.
For Reeves to take those “difficult decisions” — she has pointedly refused to rule out tax rises — the chancellor needs to firmly place the blame at the Conservative Party’s door.
The cut in rates to 5 from 5.25 percent today won’t stop her from trying.
“I don’t think the narrative the government is putting out is going to go away anytime soon, they will keep banging that drum,” Laith Khalaf, head of investment analysis at AJ Bell, said.
Murky economy
Even as the BoE muddies that message with an interest rate cut, Reeves has some vindication as the overall economic picture is still very murky.
The BoE doesn’t want to cut interest rates too fast and let inflation back off the leash. But it also doesn’t want to keep them too high and dampen an economic recovery.
“The U.K. economy has been stronger in recent months, and this is very welcome,” BoE Governor Andrew Bailey said Thursday. “But it does add to the risk that inflation could be higher than we expect if we cut interest rates too much or too quickly.”
So it’s uncertain how much the economy will improve, with the BoE’s growth projection for next year now at a measly 0.8 percent, as well as how fast rates could fall.
“It may be that we do get some positive signs, not just from the Bank but economic measures like inflation and employment and GDP, with tentative signs we have turned a corner,” said Khalaf.
“But, we’re not out of the woods yet, and the overall situation isn’t great — particularly when you look at it in the context of public finances and the money that needs to be paid back for the energy crisis and Covid.”
And that means it’s still all to play for politically. An improving economy in the long run would help Reeves fill that black hole by boosting tax revenues and making good on a promised dash for growth.
But who gets credit for an economic rebound — or blamed for slow growth – is still to play for.
Geoffrey Smith contributed reporting.
