Reeves under pressure to appoint new ratemaker at Bank of England
- Hopes of a rate cut as early as next month hang in the balance
Chancellor of the Exchequer Rachel Reeves is under pressure to appoint a new member to the Bank of England’s Monetary Policy Committee (MPC), which sets interest rates, after the election delayed the process.
This is because hopes for a rate cut next month are uncertain.
Traders are divided over when the bank will cut borrowing costs after the pound rose to a year-high against the dollar following news that the economy grew faster than expected in May.
Time for a decision: Rachel Reeves is under pressure to appoint a new member to the Bank of England’s rate-setting Monetary Policy Committee
Jonathan Haskel will leave the MPC on August 31 after six years.
The Imperial College London economics professor is seen as a “hawk”, meaning he is more likely to vote against rate cuts than more “dove-like” members.
If a replacement is not found for him quickly, there is a chance that the MPC will only consist of eight members in September.
Governor Andrew Bailey has the final say if the vote is tied.
Hopes that the 5.25 percent base rate will be cut at the next MPC meeting on August 1 grew after inflation fell to the Bank’s 2 percent target.
However, Haskel is among those urging caution over the risks posed by the continued pressure, which could see prices rise again.
“As the economy strengthens, the case for an immediate rate cut may be less strong, but low inflation and a stronger pound mean an early rate cut is still very likely,” said Gerard Lyons, chief economist at asset manager Netwealth.
Meeting: Unless a replacement is found quickly, the MPC could be reduced to just eight members when it meets in September.
“The MPC is divided but leaning towards dovishness,” he added. On government bonds, he said: “This should help the government bond market.”
Haskel’s £163,700-a-year job was first advertised in March. The advert said interviews were expected to take place in early June and that the appointment was expected to be made in time for the September meeting.
But it is believed that process has been put on hold following Rishi Sunak’s surprise decision to call an election.
A further delay could come from Parliament’s Treasury Select Committee, which normally questions appointed candidates before their terms expire.
According to sources, MPs are not expected to elect members to their committee before September.
Reeves (pictured), who has the final say on Haskel’s successor, has been cheered by the positive reception the new Labour government has received from financial markets. The pound has risen three cents to $1.30 since the landslide victory.
Gross domestic product (GDP) grew by 0.4 percent in May, a better-than-expected result, according to the Office for National Statistics.
And over the three months from March to May, the economy grew by 0.9 percent compared to the three months before, the fastest growth since January 2022. Government borrowing costs also remained stable.
Investors’ attitudes to the government will be tested again tomorrow when the bank sells £800m of government bonds.
The auction is part of the Bank’s plans to wind down its money-printing program, known as “quantitative easing” or QE.
Using QE, the Bank bought government bonds from commercial lenders to boost the economy after the 2008 financial crisis.
This proved profitable for the Bank when the cost of borrowing money was almost free. But losses from the scheme, which is covered by the Treasury, mounted after interest rates shot up following Russia’s invasion of Ukraine in 2022.
According to the Office for Budget Responsibility, the official watchdog, this means taxpayers now have to pay more than £100 billion.
According to experts, the final amount could be even higher if interest rates remain high for longer.
A Finance Ministry spokesman said the process to elect a new MPC member began in March but was extended when elections were called so that a new government “could decide on the appointment.”
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