Interest rates and growth forecast cut

“The Bank of England is cutting rates despite flagging the risks to inflation rising again this year, highlighting that fears of weak growth and a shallow recession in many parts of the UK are now moving to the forefront of the bank’s thinking.

“The rate cut should be balanced with the fact that the Bank of England seems to be undertaking quantitative tightening by selling bonds on its books or allowing them to mature – a lever that will reduce money supply and counter the impact of reducing rates. Getting to 2% inflation looks unlikely next year with many firms indicating they will increase prices, mostly due to National Insurance and National Minimum Wage increases from April.

“Given the government has ruled out increasing borrowing further to kickstart the economy, all eyes are now on whether the government can make a real dent on issues such as planning reform and bottlenecks in skills and labour. Weak construction figures also out today are a concern, although the winter is often bad for construction output. The major projects the government announced will have little short-term impact on confidence.

“High interest rates need to be accompanied by fiscal transfers within the UK from the overheating parts of the country to those already in recession but this is not really happening. The Welsh economy really needs interest rates back down to 3.5% or below to restore business confidence, but I don’t see a clear path to this over the next 12 months unless there is more upfront pain. Hopefully the UK and Welsh Governments will now increase their collaboration with businesses to help solve some of the fundamental issues inhibiting productivity and investment.”