The Bank of England could soon kill off Labour’s spending plans

Keeping rates higher for longer will undermine any moves to launch a borrowing binge

In an ideal world the chief economist of the Bank of England wouldn’t have ‘firefighter’ as part of his job description. But in this world we live in, it’s a crucial part of the role.
Speaking at the Institute of Chartered Accountants on Friday, Huw Pill appeared to try and unwind some of the comments made earlier in the week by the Bank’s Governor Andrew Bailey that sent the pound plummeting.
In an interview with the Guardian, the Governor told the paper that Threadneedle Street could get a “bit more aggressive” in its rate-cutting agenda, so long as inflation continued to stay near target. Cue market confusion and a sharply falling pound, which sank by 1.5 cents against the dollar after his comments were published on Thursday.
It was a strange intervention. The Bank has been clear and consistent with its line on interest rates for months: the rate-cutting process has begun, but it will be a slow and steady one, led by a cautious and relatively hawkish Monetary Policy Committee (MPC) that learned the hard way back in 2021 what happens when you get these calls wrong.
The sudden pivot to a dovish narrative – after keeping consistent for so long – certainly caught the attention of markets, spooked by Bailey’s seemingly off-the-cuff remarks.
Enter Pill, who only a day later made the opposite case. Speaking in London, he told his audience that “while further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast”.
He added that his decision-making on rates included “the need for such caution points to a gradual withdrawal of monetary policy restriction”. In other words, nothing about this process should be described as “aggressive”. 
Of course, neither man gets to set the agenda all on his own. The decision-making power is distributed across the nine-person committee, who each cast a vote when it comes time to make the next call on rates. 
But Pill’s comments much better reflect the decisions that have actually been made by the committee over the past few years: raising rates to their highest level in 16 years, then holding the base rate there even when inflation was slowing down rapidly. 
The start of the rate-cutting process has also been as hawkish as cuts come. The MPC started the process with a small 0.25 percentage point reduction in August, taking the base rate down to 5pc, which was followed up at September’s meeting with a decision overwhelmingly in favour of holding rates.
While there’s little doubt that higher rates are dampening the UK’s economy’s ability to grow, there is good reason for the Bank to be cautious. Having already been burned in recent years by failing to anticipate the inflation crisis, it must now take its own predictions seriously, which show inflation creeping back up by the end of the year, closer to 3pc on the year. 
While this is nothing compared to the double-digit inflation post-pandemic, it’s nevertheless a move away from the Bank’s 2pc target, and one to watch.
But the much bigger concerns come from the external factors that no one at the Bank, or indeed in the UK, can control. The spike in oil prices this week saw both Brent crude futures and US West Texas Intermediate crude futures hit a one-month high, as the cost per barrel spiked by more than $3.50. 
The risk of another energy price shock is not being taken lightly by Threadneedle Street. In the same interview, Bailey suggested that the escalation between Iran and Israel is considered to be “very serious” and is being watched “extremely closely” – which makes his comments on rates feel even more out of place.  
The prospect of rates being kept higher for longer – especially in the face of such geopolitical uncertainty – is the last news Rachel Reeves will want going into her Budget, as she tries to scrape together the extra funds for Labour’s policy agenda. 
It doesn’t help that an additional £10bn needs to be found for this year alone to make good on the inflation-busting pay raises promised to public sector workers – wage hikes being one of the warning signals the Bank looks out for in its decisions to hold or cut rates.
Like her predecessor Jeremy Hunt, Reeves has to divert close to £90bn to service the debt: in other words, paying for money that’s already been spent. In 2023/24, this sum was double the defence budget, with nothing new to show for it.
None of this will help Reeves try to sell potential changes to fiscal rules that will make it easier to borrow tens of billions more for capital investment.
While the case for building and improving infrastructure is receiving close to universal support these days, it remains a tricky time to ask markets to fund more borrowing – especially after Labour ran and won an election on the promise to stick to the Tories’ fiscal rules.
If Bailey’s intervention provided any hope, it was quickly undone by Pill’s follow-up. With the magic money tree still largely off-limits, it’s going to be a far more painful process to make the numbers add up.
Kate Andrews is Economics Editor at The Spectator