Labour to Reap Benefits of Interest Rate Cuts and a Growing Economy

File image of Keir Starmer. Source, Keir Starmer campaign.

Less than a month into his residency at 10 Downing Street, Keir Starmer will have the supportive tailwinds of a Bank of England interest rate cut behind him.

This is according to an easy majority of the economists we follow, who have been responding to the Bank of England's June interest rate decision and guidance.

The Bank kept rates on hold in its mid-year meeting, but the minutes showed it was a fine call with three members ready to vote for a rate cut. Markets read this as a sign a turning point for interest rates is near.

"The 'hold' camp dovishly split into two – those that needed more evidence to be sure that inflation persistence was waning, and those that dismissed recent strong services and wage inflation prints to argue that their decision today was finely balanced," says George Buckley, an economist at Nomura.

"This split supports the case for an August rate cut," he adds.

Money market pricing shows investors are increasingly of a similar view. Ahead of the meeting, the probability of a cut at August’s meeting was around 40%, it rose to around 60% in the wake of the meeting.

Labour is on course to secure a sizeable majority in the July 04 vote, and political commentators are wondering why Prime Minister Rishi Sunak didn't delay the election until the Autumn.

Now, it is Starmer who will preside over an economy enjoying loosening monetary policy as markets see a 90% chance of two cuts by year-end.

"The Tories could have fought an autumn election against the backdrop of two quarters of decent economic growth, several months of 2% inflation, and at least one interest rate cut," says Julian Jessop, an economist at the IEA. "As it stands, Labour will reap the benefits."

In response to the Bank of England's June communication, UK government bond yields dropped, which means the cost of finance in the economy will follow suit, easing the burden on interest rate-paying households and businesses.

"The incoming data remain key, but should give members close to switching their vote enough reason to do so. We think services inflation will continue to tick down, while timely indicators will also point to easing price pressures," says Gabriella Dickens, G7 economist at AXA Investment Managers.

Economists at NatWest say the Bank of England could deliver even more than two rate cuts.

"We continue to think that the BoE can most likely deliver 75bp of easing by year-end, which is close to 25bp more than current market pricing," says a note from NatWest in the wake of the Bank's decision.

It appears that members of the MPC are now prepared to ignore elevated wage data and services inflation, two indicators that have been a concern as they have the ability to prevent the headline CPI rate from falling to 2.0% on a sustained basis.

Services inflation was at 5.7% in May, which is well above Bank economists' most recent forecasts.

Andrew Goodwin, Chief UK Economist at Oxford Economics, thinks the those members of the MPC who will vote for a cut in August "have adopted a more forward-looking approach, citing the risk that now inflation was back in line with the target."

The minutes showed this group of decision-makers believe inflationary dynamics could "adjust as rapidly on the downside as they had done on the upside."

Goodwin says an August cut is not yet a done deal.

"Considering the majority for an August cut would probably be 5-4, it's far from a done deal. What's more, one of this month's likely doves, Ben Broadbent, will be replaced by Clare Lombardelli for the next meeting. But we think there's a good chance that Lombardelli will follow the other internal members in voting for a cut, particularly as her new role gives her ultimate responsibility for the inflation forecast," he says.

This could prevent markets from moving to fully price in an August move.