By driving inflation back up Rachel Reeves gave the Bank of England no choice (Image: Getty)
Mortgage rates will continue to rise, further punishing homeowners. It’s bad news for the rest of the economy, too, as higher borrowing costs squeeze businesses and make consumers poorer.
The UK economy shrank in both October and November, and the downturn now looks set to accelerate in December. We could be in a recession by March.
The UK desperately needs a string of cuts, to boost sentiment and get the economy moving again. But we’re not going to get it.
Just a couple of months ago, Goldman Sachs predicted UK would plunge to just 2.75% by next autumn.
Nobody is forecasting this kind of drop now. We may get just one single cut next year, leaving base rates stuck at 4.5% by the end of 2025.
So what’s happened?
Labour chancellor Rachel Reeves has made a hash of the economy, and now the BoE’s rate-setting monetary policy committee (MPC) dare not cut.
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Labour’s horror Budget is inflicting more damage by the day, even though the most disastrous measures haven’t come into force yet.
Reeves’ plan to impose £25billion of national insurance hikes on businesses will help drive prices higher from April, as firms pass on the cost to consumers.
She’s also borrowing £30billion to spend on public services, which will flood into the economy pushing up prices.
Consumer price inflation fell to 1.7% in September but climbed to 2.3% in October and 2.6% in November.
Labour’s Budget is forecast to push that to 3% and beyond.
Two other factors have contributed to the inflationary surge. First, energy prices are rising again. Second, US president proposed tax cuts and tariffs will keep inflation high.
Reeves should have avoided adding fuel to the fire, but couldn’t resist. Or didn’t realise what she was doing, a point of view that becomes more persuasive by the day.
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Almost nobody was expecting the BoE to cut today.
That’s despite the fact that both the European Central Bank and US Federal Reserve cut rates in December.
I’ve been critical of the BoE governor Andrew Bailey in the past, but today Reeves gave him no choice.
If the MPC had cut today this would have spooked markets, by suggesting the BoE had received some bad news that the rest of us don’t know about yet.
Now all we can do is wait to see if it will cut rates next year, and how bad things have to get before it does. At the rate we’re going, things could be very bad indeed.