Professor John Bryson on why inflation news 'too late' for Conservative Party, and the winners and losers from Bank of England hold on interest rates
Following news that inflation has fallen to it's lowest rate in three years, and the Bank of England's decision to hold interest rates at 5.25%, Professor John Bryson, Chair in Enterprise and Economic Geography comments:
"This month has come with the exciting news that prices in the UK only rose by 2% in the year to May 2024. This is excellent news for consumers as inflation is at its lowest rate for almost three years. The government sets the Bank of England this 2% inflation target that it must meet by trying to regulate interest rates.
"An increase in interest rates is intended to dampen economic demand with the outcome being a reduction in consumer expenditure and an increase in unemployment.
“For the Conservative Party this decline in the inflation rate comes too late.
"There are two problems here. First, these is a lag time between a decline in the inflation rate and voter perception of any improvement in household finances. Second, and more worryingly, the Bank of England is notoriously conservative in its approach to managing inflation through interest rate adjustments. The Bank tends to wait before increasing interest rates and the same delay is applied to the decision to cut the rate. UK interest rates continue to remain at a 16 year high of 5.25%.
The Bank is being politically correct in arguing that the election should not impact on this decision, but there is a paradox here
"We all know that UK interest rates must be cut, but the question is when?
“The Bank has stressed that the timing of the general election had no bearing on the decision to keep rates at 5.25%, and that this was an apolitical decision. Nevertheless, holding the rate at 5.25% will continue to stress companies and households.
"The Bank is being politically correct in arguing that the election should not impact on this decision, but there is a paradox here. The general election increases uncertainty, and this then impacts on consumer behaviour and on corporate decision-making processes. It might be that putting off an interest rate reduction until August is unwise given the additional uncertainty that comes with a general election.
"There are winners and losers here.
"The next government will benefit from an eventual interest rate reduction. The losers are all those who must meet the demands placed on their finances by the Bank’s over-conservative approach.
"One just hopes that the next government manages to reduce uncertainty and enhances economic stability to underpin growth. Nevertheless, the outlook does not seem to be one of increased certainty. In this election, the political parties are promising everything, but they are reluctant to reveal the true costs and impacts of their expenditure plans."
Chair in Enterprise and Economic Geography
Professor John Bryson is Chair in Enterprise and Economic Geography at the University of Birmingham, UK.
