Kate Andrews Kate Andrews

Can Sunak really take credit for future interest rate cuts?

Rishi Sunak (Credit: Getty images)

When the Bank of England finally delivers an interest rate cut, can the Tory party take credit for it? Rishi Sunak thinks so. ‘We are the party who has committed to bringing down inflation, which is a necessary condition for bringing down interest rates,’ he told the Times in an interview published today. ‘And I think people can see we have delivered that.’

Of course no politician is in a position to promise or deliver a rate cut. That decision sits firmly with the BoE’s Monetary Policy Committee, who this month voted to hold the base rate 5.25 per cent for the six time in a row. But to be fair to Sunak, he has not suggested he controls interest rates or that his party can offer up lower rates as a policy. Rather, he is trying to link what his party thinks is done to tackle inflation to rates now ‘heading in the right direction’ – with an expected cut to take place towards the end of the summer.

Is it a fair connection he’s making? The problem for this government is that their ability to control the inflation rate has always been somewhat exaggerated: just as politicians were not responsible for the global factors that saw an inflation crisis unfold, they were also not responsible for getting it back under control. What Sunak does deserve credit for is planning for a possible price spiral, back when it was deeply unpopular to suggest any such thing would happen. The then chancellor was in a small minority of people willing to acknowledge that lockdowns and reopenings could have a serious impact on inflation. He was right, but again, the tools to tackle inflation belong to the Bank of England, which waited far too long to start hiking rates. 

The government’s biggest claim to bringing down the inflation rate is really that it tried to avoid fuelling it – public sector pay negotiations being the primary example of this. But that is not an area where the Tories have received any credit (the opposite in fact) and isn’t exactly what they want to draw attention to in the weeks before an election – especially with the junior doctors planning another five-day strike the week before polling day. 

Indeed the best chance of linking the Tories to a rate cut would have been for a cut to actually have been delivered on their watch – an event that is now certain to be delayed until after the election. Markets continue to expect a few interest rate cuts before the end of the year (tracked by The Spectator’s data hub below), which are forecast to start over the summer. But similar to the Federal Reserve in the United States, central banks must avoid accusations of playing politics at all costs. This means that they will stick with the status quo (i.e. holding rates) until after their respective elections. While the prospects of a June rate cut in the UK were already starting to slip, it’s now guaranteed that there will be no start to the process until at least August.

It’s one of the big sacrifices Sunak made when he decided to call an election this side of the year. Had he waited until autumn, we would have likely been able to cite at least one, if not two, rate cuts, and also very likely a healthier economy that was outperforming the current forecasts (as Katy Balls writes for this week’s magazine, worries over the Rwanda scheme and what it might mean for Britain’s standing in the ECHR are thought to have sped up the election timeline). It’s a big gamble he’s taken: not only might the economy tell a better story in six months, but there is a chance that a Labour government will be taking credit for a rosier picture, even if they have only recently entered Downing Street. 

Of course there are factors that the Tories can control and take ownership of – the tax burden included. Speaking to the Times, Sunak committed to ‘lower the tax burden’ were his party to win re-election. But as the Tories have found for the better part of two years now, the tax narrative is not playing in their favour as it so often does – likely because the overall tax burden has been rising on Sunak’s watch, on track to nearly reach a post-war high. 

Just this morning Jeremy Hunt has confirmed that if the Tories return to Downing Street the freeze on tax thresholds will stay in place until 2028. With the majority of workers now paying higher income tax thanks to this freeze, the insistence that the tax burden is lifting remains fairly unconvincing