Cut interest rates, City PM Shadow MPC tells Bank of England
The Bank of England should cut interest rates by 25 basis points when it meets tomorrow, City PM’s Shadow Monetary Policy Committee has said in a three-way split decision.
In the face of the dual problems of high inflation and a continued jobs market decline, the majority of experts on City PM’s nine-strong Shadow MPC have said looser monetary policy would help the UK achieve a safe landing at the UK’s target 2 per cent rate.
Economists, who voted independently of the views of their organisations, said further evidence of a softening in the jobs market was enough to prompt them to vote for interest rates to be lowered to 3.75 per cent.
Should the Bank follow the Shadow MPC’s call, it would bring borrowing costs to their lowest level in nearly three years, but would remain well above the levels seen in the 2010s.
Six Shadow MPC members voted for a 25 basis point cut. Policy Exchange’s Ben Ramanauskas went further, backing a 50 basis point cut, while former Bank policymaker Jonathan Haskel bucked the consensus and said rates should be held.
Vicky Pryce, the former head of the UK’s economics service, said recent data had not shown “much evidence of excess demand in the economy” to prevent a cut in rates while Capital Economics deputy chief UK economist Ruth Gregory said falling inflation expectations, stalling retail sales and a declining jobs market would allow further rate cuts.
Ramanauskas suggested the Bank should take a more aggressive approach to help correct worrying trends in the labour market that could push down on inflation while Haskel said high levels of wage growth was a top concern for price stability.
Some rate-setters including deputy governor Clare Lombardelli suggested any upcoming cuts would be one of the last times the Bank opts to lower borrowing costs. Capital Economics believes interest rates could fall to as low as 3 per cent while markets have priced in a drop to around 3.5 per cent by the end of next year.
Anna Leach – Institute of Directors, chief economist
Vote: Cut by 25 basis points
What has influenced your decision?
“Although the inflation rate still sits well outside the target range, various measures are moving in the ‘right’ direction to support further rate cuts.
“The labour market is showing signs of material loosening: unemployment has risen above 1.8m – higher than levels reached during the pandemic and the highest since 2015, and private sector pay growth is now below 4 per cent on the 3 month measure.
“Inflation expectations have fallen a little as well, and forward looking measures of activity – investment and headcount intentions in particular – suggest demand will weaken further, creating further space for rates to come down and cushion activity.”
Ben Ramanauskas – Senior research fellow in economics at Policy Exchange
Vote: Cut by 50 basis points
What has influenced your decision?
“The labour market – already suffering due to last year’s employers’ national insurance contributions hike – will continue to cool as a result of the measures in the Employment Rights Bill and increases to the minimum wage. Unemployment will increase and it will be young people who will be most adversely affected.
“Growth has continued to be sluggish and has been lower than previously forecast by the Bank. This trend will continue due to the damaging hodgepodge of tax increases announced in last month’s Budget as investor, consumer and business confidence are further undermined.
“All of this will dampen demand, meaning that inflation is likely to return to target and may then actually fall below target.
“The MPC needs to take bold action now. Doing so will then allow it to return to a pattern of gradually lowering rates and help to achieve a soft landing for the economy.”
Jack Meaning – Barclays chief UK economist
Vote: Cut by 25 basis points
What has influenced your decision?
“I thought the economic case for a cut had been made in November and since then economic data has continued to soften.
“The labour market has been loosening all year, with unemployment rising and wage growth consistently undershooting the Bank of England’s forecasts. We are now past the peak of inflation and there are tentative signs that inflation expectations are also starting to come down.
“There is already slack in the UK economy and the weakness we have seen in spending and investment in recent months is only going to exacerbate that.
“Even with a rate cut now, policy would remain restrictive, and it will be a year before the benefits are felt in the real economy. Waiting until inflation is back at 2 per cent – which we expect in the second quarter next year – risks leaving it too late.”
Jonathan Haskel – Professor of Economics at Imperial College Business School and former MPC member
Vote: Hold interest rates
What has influenced your decision?
“I am still concerned by labour market inflationary pressures and would like to wait to see the downward trend in wage inflation firmly established.”
Julian Jessop – Independent economist
Vote: Hold interest rates
What has influenced your decision?
“The Monetary Policy Committee’s job is to worry about inflation, which has remained stubbornly high, not to bail out a government with no growth strategy of its own.
“A short delay until the next meeting (in the first week of February) could boost the MPC’s anti-inflation credibility and allow more time to assess the outlook for 2026.
“If the new evidence permits, the MPC could then resume the policy of cutting rates gradually alongside each quarterly Monetary Policy Report. Cuts in early February and late April would take official rates to 3.5 per cent. Hopefully, this would be as low as they have to go.”
Kallum Pickering – Peel Hunt, chief economist
Vote: Cut by 25 basis points
What has influenced your decision?
“Economic momentum has stagnated as increased policy uncertainty around the recent budget sapped demand. Meanwhile, inflation has started to fall sharply from its peak.
“Underlying drivers of inflation including money and credit growth, as well as wage growth, are consistent with sustained disinflation towards 2 per cent by late 2026.
“Monetary policy can be eased further towards a more neutral setting – and should be coupled with strong guidance that monetary policy could react strongly in case persistent soft momentum increases the risk that inflation could undershoot the 2 per cent target over the medium-term.”
Katharine Neiss – PGIM Fixed Income chief European economist
Vote: Cut by 25 basis points
What has influenced your decision?
“A weakening labour market, against a backdrop of easing near term inflation momentum, has tipped the balance in favour of a cut in rates.”
Ruth Gregory – Capital Economics deputy chief UK economist
Vote: Cut by 25 basis points
What has influenced your decision?
“Almost every major data release since the November policy meeting, including those on the labour market, CPI inflation, GDP, retail sales and the PMIs, suggest disinflationary pressures are building.
“Admittedly, we think food inflation has yet to pass the peak. But households’ inflation expectations have cooled. Much of the 2025 inflation hump is being driven by jumps in prices of items that are partly set by the government or linked to previous rates of inflation. These jumps are unlikely to be repeated in April 2026.
“The loosening in the labour market over the last year will continue to exert downward pressure on services inflation.”
Vicky Pryce – Centre for Economics and Business Research chief economic adviser
Vote: Cut by 25 basis points
What has influenced your decision?
“Not much evidence of excess demand in the economy to prevent a cut in rates, while continued, though reduced, quantitative tightening still provides monetary restraint.