There is not much that Chancellor Rachel Reeves can look forward to right now. The Labour party has just been hammered in the local elections. The economy has stagnated, and government borrowing has started to spiral out of control. There is, however, this: the City now expects interest rates to start falling at the fastest pace since the financial crisis a decade and a half ago. There is just one catch: it probably won’t be enough to save Reeves’s failing chancellorship.
The Bank of England is widely expected to cut interest rates from 4.5 per cent to 4.25 per cent next week. Even better, the consensus among City forecasters is that we will see a series of rate cuts over the next six months that will bring rates below 3 per cent by the end of the year. It will be the most rapid series of cuts since the crash of 2008 and 2009. With inflation subdued, and with President Trump’s tariff wars plunging the global trading system into havoc, the Bank will almost certainly conclude that the cost of money needs to come down sharply.
This will bring Reeves some short-term relief. It will lower the cost of government borrowing, making it a little easier to stay within her fiscal rules. And it will bring down mortgage costs, easing the pressure on consumers, as well as allowing struggling companies to borrow on easier terms. At the margin, it will improve the outlook for the economy.
The trouble is, no one should kid themselves about it making any real difference. The UK’s economic problems are now structural. Taxes have been pushed up far too aggressively, discouraging people from working, and driving away investment, especially by small businesses and entrepreneurs. Our once flexible labour market has been destroyed by a new raft of employment rights. The planning system remains a mess, and, worst of all, the UK’s energy costs are now almost double the levels in the United States, and 40 per cent more than in France, crushing industry. A few cuts in interest rates will help sustain consumer demand. But it won’t fix any of these problems.
The UK is stuck in a doom loop of zero growth and constantly rising taxes. Lower interest rate won’t change that – and unless Reeves is willing to start tackling those issues, her chancellorship will remain doomed to failure.
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