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After weeks of unpredictable skies and cooler-than-normal temperatures, it felt like summer had gone missing this year. The warmth and sunshine everyone looks forward to, seemed like a distant memory, with little sign of their return. However, the past two weeks have brought a noticeable change, with the sun finally breaking through and giving us the summer weather, we have been waiting for.
Equally unpredictable has been the guidance from developed market central banks on when the first interest rate cuts will materialise. Part of this question was answered yesterday by the Bank of England (BoE), who announced that they have cut interest rates by 0.25%, down to 5%. This takes UK rates back to where they were a year ago. This was a pretty cautious rate cut, with only 5 of the 9 Monetary Policy Committee members voting for it, yet nonetheless, rates in the UK have started to fall. Now all eyes turn to the US Federal Reserve (Fed) in September to see if they follow suit. After the Fed Chairman Jerome Powell spoke on Wednesday, it seems very likely that they will.
The BoE Governor Andrew Bailey was clear that borrowers should not expect rates to reduce quickly, but over a longer time period. The decision came as data suggested headline inflation, which fell to 2 percent in May, stayed at this level through June, despite services inflation remaining stubbornly high. While the BoE has taken this step, it's part of a broader trend among central banks, which are cautiously easing rates. They are moving slowly to avoid the risk of reigniting inflation by cutting rates too quickly or by too much.
On Wednesday, the Fed held its July monetary policy meeting, and while interest rates were left unchanged, Fed Chair Jerome Powell signalled that a rate reduction could be on the table as soon as their next meeting in September. Powell noted that recent data shows substantial progress toward the Fed's target of reducing inflation to 2 percent. However, he stressed that officials would need even “greater confidence” before moving to cut rates. His comments provided the clearest signal yet that the central bank is gearing up for a policy shift, more than two years after it began its aggressive campaign to tackle inflation.
There has been a significant rift developing between the Chancellor and the Shadow Chancellor this week. On Monday, Rachel Reeves, the new Labour party Chancellor, announced that there was a black hole of £22bn in the UK’s finances that, she claims, the Conservative party had sought to cover up during the election. Cue an emotional debate in Parliament with the now Shadow Chancellor Jeremy Hunt fiercely denying this. It appears now that the UK’s spending watchdog, the Office for Budget Responsibility (OBR), has been asked to investigate Hunts previous forecasts.
The claim of identifying a hitherto unseen black hole in the public finances was somewhat expected and allows the new Chancellor to put in place possible tax increases in areas such as Inheritance Tax and Capital Gains Tax, that have not been mentioned during the election. Chancellor Reeves stated, “Upon my arrival at the Treasury three weeks ago, it became clear that there were things that I did not know, things that the party opposite covered up: covered up from the opposition, covered up from this house, covered up from the country.” Serious accusations indeed.
Hunt retaliated by claiming that he had been very honest about the state of finances, “those public finances were audited by the OBR just 10 weeks before the election was called. We are now expected to believe that in that short period a £20bn+ black hole has magically emerged. She wants to blame the last Conservative government for tax rises and project cancellations she has been planning all along.” Rob Jenrick, who recently launched his bid to lead the Conservative Party, lifted the mood by comparing Reeves to a “dodgy car mechanic”. You give her your Volvo for a week, she comes back with new problems and a higher price; “and you both know she planned this all along”.
This is a story that will develop over the weeks and months that comes as we head towards a Budget date of the 30th October. What is clear is that an element of austerity is returning and quite how the new Chancellor manages to balance her tax plans with supporting a growing business culture in the UK and encouraging these businesses to invest and grow and attract new talent will be quite a juggling act.
Once the OBR reviews the numbers, I imagine the picture will become clearer. For now, I suggest we leave the politicians to their wrangling and make the most of the return to summer sunshine while it lasts and support our athletes over in France, who have had the most successful first five days of an Olympics for 112 years. That seems a much more encouraging note to end on. Do have a good weekend.
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