Coffee House Shots
Sunak's gift to Labour
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The monetary policy committee voted 5 to 4 for a very small rate cut, null 0.25 percentage points cut, which takes the base rate from 5.25% down to 5%. Financial markets were cautiously expecting something, but they knew it would be close. And indeed, it was. The Bank of England says that it's been watching two pieces of economic information very closely, wages and also services inflation, which has not been coming down as quickly as that headline rate. Now, here's the thing. It still hasn't dropped all that much. Both of those numbers have been pretty sticky. However, the Bank of England says that on balance, clearly, five members thought now is the time to start signaling that interest rates could come down a little bit. I think you're already hearing some speculation about the timing of this. Was it political? This labor has been in power for one month. You've got no rate cuts under the Tories. All of a sudden, you get a rate cut. I think we have to be incredibly skeptical of any attempt to suggest that the BOE is practicing politicking here. There was never going to be a rate cut once the election was called. It just wasn't going to happen. I know the Bank of England said that its decision in June to hold rates had nothing to do with the election, but central banks stick to the status quo once elections are called because they don't want to be seen to be playing politics. Also, the Bank of England was signaling in the spring that a rate cut was probably coming over the summer. And that meant around now, especially with the election being before the autumn. So I think this was coming for a very long time. It's very small. You've got forecasters like capital economics saying this is not going to be consistent necessarily. The next ones they think is going to come in November. Others will say differently. But the point is that we're on a new trajectory now. I think it's a positive one. It is good news for the Labor Party. Of course it is. They're getting the benefits of a lot of good economic data that we always expect to come over the summer that they haven't necessarily contributed to. They haven't been in power. I thought actually one of the most interesting things in the minutes today is how much the BOE have revised up their growth forecast for the year from no.5% in 2024 to 1.5%. It is looking to be a better economic year than anybody thought at the start. Again, Katie raised in the question of why Russia has seen that called an election before he could reap the rewards of all of these good news. Yeah, I think this is a good day to think about that. I mean, there was a certain irony or tragic comedy vibe about the fact that Russia's in that called an election. And I do think, I know there are lots of reasons. They were definitely worried about how every month more people were going on to expensive mortgages and increased to what they're normally paying. They were definitely worried for a wonder and potential resignations. There were lots of factors. I think that was also, if we are being honest, a bit of a sense that everyone on Downing Street was frazzled. They were exhausted by things. Everything was getting more difficult in terms of the party. And there was sense of why not just to end it now. Now, Rishi Zunak has not ended it now. He still has to be around until November in a front line politics job. It's just now he is in the Norman Shulseye building of Parliament with about two or three advisors as opposed to in Downing Street, where you would have a lot more support, probably more tickets to the Olympics, amongst other things. If you ask me if I would rather you know, have a few months in number 10, or have a few months as either of the oppositional, my party bickered about he'd replaced me after his story about election result. I would have picked going long until November and then trying to leave. I do think there is an irony. He is still going to be leader of the Tory party. It's just about the trappings that come of it. Now, I know it's more complicated than a part-for-part, but strong argument for waiting for the autumns always that you were likely to get at least one rake up, maybe even two that could be going too far before the election. I think that while this should improve some of the mortgage deals, there was a question as to whether voters would really be grateful to the Tories for it happening, just in the sense that there are clearly global factors that have led to higher interest rates. It's just that the timing of those trusts is mini-budget, and then that the Tories probably got more blame than they should have done, just in the sense that there is a global trend, but the UK became the ugliest baby because of the mini-budget, and therefore I think there's just now an intrinsic link between the Tories and higher mortgages. In a way, I think about that, there would potentially be some blame, but it wouldn't be as much. So if there was one rate cut, would voters sell a week for give all of this? Probably not, but there still would be the impact, particularly with the improved growth. These aren't from Labour announcing policies just yesterday. Much more is taken into account. I think improved growth, a rate cut, at various things going on, I think would have given them, and potentially could throw in a flight to Rwanda, I think would have given them a bit more of a fighting chance to potentially hit 200 MPs, as opposed to the 121 they're on. Of course, this is very much what ifery, and we're talking hypotheticals, and as a chance, as I think they suspected, the party would have just become more fragmented, more demonic, harder to govern. But I do think on a day like today, you do slightly wonder what would be looking like if he hadn't called that election. Okay, we started the week talking a lot about Rachel Reeves and the first kind of tough decisions that she's had to make economically speaking. Do you think that Labour's got away with it in terms of what was quite controversial moves on Monday, but actually with the news, how the news agenda has shaken out in the day since the actually Labour have probably copped as little flag as possible with controversial policies? I think Labour have very successfully landed a blow on the Tory party, and part of the problem is that the Tory party is trying to replace its leader doesn't have a sense of direction right now. They wouldn't have a leader yet, even if they weren't going to do this incredibly long timeline. But the sense is just that they're out in the wilderness for quite some time and Labour gets to set the narrative. I don't think that the debate over that £22 billion fiscal black hole is over, though. No doubt Labour will be pushing that figure leading up to the budget when we're expecting tax rises. Rachel Reeves has now confirmed there will be some kind of tax rises, and they're going to want to be able to say this is the Tory party's fault, not ours. I do think the Tories will get slightly more savvy about pushing back on that, not least because there's still a lot of outstanding questions, even if you just look at the breakdown of the budget lines about where this £22 billion fiscal black hole comes from. There are a lot of unanswered questions, for example, about where the reserve money has gone. I think people will be asking more questions, not fewer going into the 30th October budget. It was interesting. Katie's point about mortgages nailed it because in the statement today from the Chancellor, it says the interest rate cut will be a great news to mortgage holders who suffered from the mini-budget. It's political gift after political gift that Labour is getting to capitalize on, even though the government has not set interest rates. And as Katie says, this has been a long time coming. There are lots of factors leading up to this. It is, of course, a lot of the tough decisions that were made two years ago that have got the UK to a slightly better place economically. Let's be clear. The growth figures are nothing incredible, but we've got a long way to go to make good on Labour's pledge to have the most impressive growth rate amongst advanced economies, but it's better than we thought it was going to be. They're in charge now, and they get to capitalize on these moments, and they be silly not to. Really, it's just that the economic news is coming in so quickly, and it's so good. It has been a pretty lucky run for Labour. And then the interesting thing is, because the economic news is coming in, it's good. It also does feed us the question, which has Rachael Reeves got away with it in terms of the fiscal black hole. And you can argue, "Oh, there are some costs I didn't expect," but obviously it's slightly jarring in some ways to hear, "Oh, the economy's improving, so we're revising growth forecasts and we're having a rate stop," because the things are so awful, and the Tories didn't tell us how awful they were, and that's why we actually have to stop winter fuel lands for anyone, unless they're on pension benefit, and there's going to be lots of tax rises to come in autumn. So, look, I think probably it's a better problem to have them alternative. Perhaps two things can be true at once, but ultimately the economy is turning a corner, but also Rachael Reeves needs to keep saying it's even worse than she expected when she got in. And I think the question, is she out of the woods yet? I think you can say that I think Rachael Reeves and her team have delivered this week. Well, it has been a professional operation. I think that OBR letter, saying we're going to look into this, was so helpful to Labor, during the sense, it's a non-political organization, ultimately coming in and saying, "Yes, we actually do think there's a problem here." The head of the OBR has been criticized by some farmers looking as though it could level be perceived as being political, but the OBR are non-political. So, I think just on paper, that's very helpful. But I think the question is, will Rachael Reeves and Keir Star would pay a price with voters for this? It's still in the air. We just don't know yet. And I think you just pick up a few things. I mean, I was spoken to some Labor MPs and they say they have had very, very little on the fuel lamps in terms of people complaining about that. But then you speak to others and they say, "No, no, no. My pensioners and my constituency are really worried about," and they say they weren't told about this. And then you add to that the fact that we are expecting some measures more in assets and autumn. And I think that there's still the risk, in my view, that there is this narrative, which is Labor said they wouldn't do all these things, and here are the links and they have done them. I think they've done a good job of crafting the Canada narrative, but of all the comparisons with David Cameron and George Osborne. I mean, David Cameron and George Osborne ran before the election and during it on the idea that the Labor inheritance was already bad. So they would have to fix it and make cuts. Labor is slightly different because they're doing it completely after the election. And therefore, I just don't think anyone can say right now it's a massive disaster or it was a massive success, even though apologies might make a more interesting podcast. One last thing very quickly. Wells politicians don't set interest rates. Their policies can contribute to what the monetary policy committee decides to do. And given the fact that the Bank of England has been watching wage increases so carefully, the fact that the first big spending decision that Rachel Reuss has made has been to give that 5.5% pay raise in full is something that will have definitely caught their attention. It might mean that you don't get another interest rate cut for a while longer. Not necessarily, it will depend on the extent to which the BOE thinks their underlying pressures caused by that. It was something that was very much on the Tory party's mind. If you spoke to ministers last year and you asked them about public sector pay raises, you know, perhaps this was politically convenient for them to say. But one of the number one reasons they would say they were hesitant to do anything or to do anything bold was because they didn't want it to be inflationary. And again, you know, that's convenient. There's plenty of politics around that. But the fact that Reuss has gone for it in full will not have been missed by the Bank of England in terms of potentially future rate cuts. Kate and Katie, thanks very much. And thank you very much for listening. Now, if you enjoyed this podcast, please do give us a rating and a review and do subscribe to it too. (upbeat music) (gentle music)