The Bank of England can afford to hold its nerve and leave rates unchanged at the next MPC meeting. The unreliability of the Labour Force Survey (LFS) has made it more difficult for the central bank to gauge domestic price pressures. But alternative labour market indicators suggest any cutting cycle will be modest. Core inflation remains significantly above target, firming from 3.49% to 3.52% in June, with service inflation picking up from 5.68% to 5.74%.
The resounding Labour Party victory earlier this month means the UK now has enviable political stability. Sterling continues to climb on a trade-weighted basis. Alongside robust real wage growth, large accumulated ‘excess savings’ should provide an additional impetus to consumer spending.
Long-term risks to the public finances remain, of course. The Treasury’s first major challenge will be to negotiate public sector pay settlements for the NHS and teachers. Independent pay review bodies representing 514,000 teachers and 1.36mn NHS workers have both recommended pay rises of around 5.5% for the financial year 2024-25. Labour’s plans to get Britain building again are likely to come up against significant obstacles. And a steep ramp up in investment is required for the Labour Party to reach its 2030 clean energy targets. But for now, the UK is having a long overdue moment in the sun.
