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Jeremy Hunt has raised the prospect of the Bank of England reducing interest rates in 2024, saying a cut would be a crucial moment in shifting the economic mood in what is expected to be an election year.
The UK chancellor said in an interview with the Financial Times that 2024 was “when we need to throw off our pessimism and declinism about the UK economy”.
Asked if people would feel better off by the end of next year, Hunt said: “There’s a reasonable chance that if we stick to the course we’re on, we’re able to bring down inflation, the Bank of England might decide they can start to reduce interest rates.”
“That probably is the moment when people will begin to have more confidence about their own personal prospects and the prospects of their family,” he added.
The chancellor’s comments came after official data on Wednesday showed a steep dive in the rate of consumer price growth to 3.9 per cent in November.
The figures triggered increased expectations of interest rate cuts in the first half of next year and prompted criticism from some analysts that the BoE has been too hawkish.
Conservative strategists expect Rishi Sunak to call a general election next autumn. One has to be held by January 2025 at the latest.
Hunt’s talk of rate cuts will jar with the BoE, which jealously guards its independence and has been insisting it is too soon to discuss easing policy.
The BoE’s Monetary Policy Committee last week held rates at a 15-year high of 5.25 per cent as Andrew Bailey, the bank’s governor, said there was “still some way to go” before inflation reached its 2 per cent target.
The MPC also kept open the option of hiking rates further if necessary. Three of its nine members voted to raise rates immediately to 5.5 per cent.
Ben Broadbent, one of the bank’s deputy governors, this week warned that uncertainty over the state of the UK’s labour market will force the BoE to wait longer before it can safely conclude inflation has been contained and cut interest rates.
But investors are sceptical about the BoE’s repeated warnings that policy needs to stay tight and markets are pricing in a first rate cut as soon as May, with four reductions to follow throughout 2024.
If expectations for rate cuts are sustained, along with recent declines in the yields investors demand on gilts, Hunt’s “headroom” against his debt-reduction rule would almost double to about £25bn, said economists at Pantheon Macroeconomics.
Hunt acknowledged that lower debt servicing costs could give him more fiscal space to cut taxes in his spring Budget, expected in March, but said that “these things can swing wildly in a short space of time”.
He also told Bloomberg TV: “We would like to bring down the tax burden in a way that is responsible if we’re able to do so.” But Hunt said he would not compromise the fight against inflation.
Hunt has also ruled out inflation-fuelling public sector pay rises. On Wednesday ministers warned that recent record pay deals for public sector workers were one-offs.
The chancellor was speaking in Bern after signing a UK-Swiss financial services deal with his counterpart Karin Keller-Sutter. Hunt said it was “a global first that builds on the UK and Switzerland’s strengths as two of the world’s largest financial centres”.
The two countries will mutually recognise each other’s laws and regulations, easing trade in areas including asset management, banking and investment services.
Hunt hopes the agreement will serve as a blueprint for financial services deals with other countries. He said mutual recognition arrangements were more flexible than EU “equivalence” deals, which require both sides to maintain alignment of their rules in future.
“It’s really about the level of trust you have in each other’s regulatory frameworks — that’s why it was easy to do with Switzerland,” he said. “It doesn’t require dynamic regulatory alignment, which is what the EU has always said is necessary in any equivalence deals.”
Hunt said it was “impossible to underestimate the significance of this new model”, which he said could be the template for similar deals with other countries where there was “trust” in each other’s systems, citing Singapore, Japan and the US.