A bold call to action has been made by the Trades Union Congress (TUC) to the Bank of England: cut interest rates to stimulate consumer spending and reignite economic growth. This plea comes amidst concerns that UK consumers are falling behind their international counterparts, with official data revealing a mere 0.1% GDP expansion in the final quarter of last year.
The Bank's monetary policy committee, in a close 5-4 vote, decided to maintain borrowing costs this month, following six cuts since mid-2024. While some committee members worry about high wage growth potentially triggering inflation, the TUC emphasizes the urgency of addressing weak growth.
Paul Nowak, TUC's general secretary, asserts, "The Bank of England must take decisive action. Last year, they were hesitant and slow to react. This year, they should prioritize growth with a series of rapid interest rate cuts. Lower rates will benefit households and the high street, putting money back into people's pockets to spend and boosting consumer and business confidence."
TUC's analysis reveals a concerning trend: consumer demand in the UK has grown slower over the past three years compared to 32 of the 37 industrialised economies in the OECD. Moreover, consumer demand, which typically accounts for two-thirds of economic growth since the 2008 financial crisis, has made no contribution to growth over the past two years.
The Bank is anticipated to cut rates at its March meeting, following this month's close vote. Chancellor Rachel Reeves has paved the way for further cuts with her November budget policies aimed at reducing inflation, including cutting energy bills from April. The monetary policy committee believes these measures will bring inflation back to the 2% target by spring, from 3.4% in December.
However, some businesses argue that Reeves' decisions to raise employer national insurance contributions and the national minimum wage have contributed to inflation, as employers pass on these costs through price increases. Huw Pill, the Bank's chief economist, believes interest rates are already "a little bit too low" and that "underlying" inflation is likely at 2.5%, excluding the impact of Reeves' price-cutting policies.
Amidst the recent turmoil within the Labour party, Chancellor Reeves is determined to stay the course with her growth strategy, which includes boosting infrastructure investment, liberalizing planning reforms, and tackling inflation. She plans to deliver a low-key Commons statement on March 3rd, responding to updated economic forecasts by the Office for Budget Responsibility. This contrasts with last year's spring statement, where she made hasty welfare cuts that were later reversed.
Reeves will then reiterate her commitment to "securonomics" in a speech later this spring, a strategy that combines an activist industrial policy with supply-side changes like cutting red tape. Responding to recent lacklustre growth figures, Reeves expressed confidence in her economic decisions, stating, "I'm confident that our measures to stabilize the economy, attract investment, and our planning and regulatory changes will deliver stronger growth this year."
Labour's economic policy is expected to be a key focus in any leadership contest. City analysts are assessing the likelihood of certain candidates pursuing more relaxed tax and spending policies, which could impact government bond markets.
