Bank of England raises alarm on unemployment as interest rates unchanged
The Bank of England has held interest rates but policymakers warned that the spiralling unemployment rate and weak growth was weighing down on price growth.
In its decision on Thursday, the Bank’s Monetary Policy Committee voted 5-4 to leave interest rates at 3.75 per cent.
But economists warned that unemployment could jump higher over the coming months. Growth forecasts were also downgraded given firms’ nerves about investment plans and weak demand across the UK economy.
The unemployment rate could peak at 5.3 per cent this year, compared to a previous forecast of five per cent.
In a damning revision for Chancellor Rachel Reeves, the Bank now expects GDP growth to be 0.9 per cent this year, compared to a previous forecast of 1.2 per cent.
While governor Andrew Bailey voted for interest rates to be held given the lack of clear evidence on inflation easing, he maintained that further cuts were set to come as price growth was set to fall to near the Bank’s target two per cent rate in April.
“We now think that inflation will fall back to two per cent by the spring,” Bailey said, with previous forecasts showing inflation only dropping to its target from 2027. “That’s good news.”
“We need to make sure that inflation stays there, so we’ve held rates unchanged at 3.75 per cent today.
“All going well, there should be scope for some further reduction in Bank Rate this year.”
Shadow chancellor Mel Stride said: “Interest rates are staying higher for longer because inflation is rising as a direct result of Labour’s choices.
“The decisions to hike taxes and increase borrowing to fund more welfare has flatlined growth and pushed up unemployment and inflation.”
The Institute of Chartered Accountants in England and Wales’ economist Suren Thiru said the decision would be a “disheartening setback” for businesses battling against rising costs.
“Though the Bank’s forecast of lower inflation suggests that more interest rate cuts are coming, this latest decision confirms that the pace of easing will remain painstakingly cautious with policy already close to its neutral rate.
Interest rate cuts to come
The main drivers of easing price growth are Budget policies on energy bills introduced by Reeves and weaker demand across consumers.
The Bank estimated that Budget measures, including stripping energy subsidy costs from household bills and delaying a rise in fuel duty, would lower inflation by 0.5 percentage points.
But higher taxes, elevated savings levels and weak growth across the UK could dampen demand over the next year. The Bank also slightly reduced its pay growth forecasts, with analysis suggesting high public sector wage rises over the last year would not filter through into the private sector.
Cost pressures due to higher national insurance contributions and another rise in the living wage had put pressure on firms which hire workers on lower wages across accommodation and hospitality sectors.
Chief economist Huw Pill, who voted for interest rates to be held and is seen as one of the more hawkish members on the MPC, said there were “risks” around bringing inflation down to the Bank’s target rate and argued that interest rate cuts had been “overly rapid”.
“I continue to favour a cautious withdrawal of policy restriction, guided by longer-term trends rather than short-term news,” he said.
Deputy governor Clare Lombardelli and external member Megan Greene said they were concerned that firms would continue setting wages at a higher level than Bank officials feel comfortable with.
They also suggested that expectations among Britons of higher price growth over the next year could keep prices elevated.
MPC members Sarah Breeden, Dave Ramsden, Swati Dhingra and Alan Taylor held that weaker demand forecasts warranted another interest rate cut.
Bank members warned that cutting rates too quickly could spring inflation back up, adding that it would be “costly to change course in that event”.
It is also unclear how low most MPC members think interest rates will go, though Taylor said he backed three more 25 basis point cuts.