Reeves vows to clear way for BoE rate cuts with cost of living pledge

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Rachel Reeves has vowed to smooth the path to further Bank of England interest rate cuts with Budget measures aimed at curbing inflation and easing the cost of living.

The chancellor told the Financial Times that she was determined to get a grip on borrowing and would take steps in her Budget to cut household bills, creating space for further BoE rate cuts in the coming months.

“There will be targeted action in the Budget around prices because I want to bring down the cost of living for families,” Reeves said on Tuesday. “And I want to see interest rates, which have gone down five times in the last year and a bit, come down further.”

Among the measures being considered by the Treasury are moves to cut electricity bills — such as scrapping VAT on household power — which would bring down inflation.

A Treasury source said: “The chancellor’s view is that tackling the cost of living is urgent, and everything is on the table, including measures to bring down energy bills.”

The chancellor’s words come ahead of inflation data for September, due on Wednesday morning. The BoE has predicted price growth will accelerate to 4 per cent in the month, compared with 3.8 per cent in August.

Reeves will meet fellow cabinet ministers on Thursday to review policy decisions in their brief that may be contributing to inflation and higher costs, the source added.

Meanwhile, the chancellor has prepared the ground for hefty tax rises in her Budget on November 26 by confirming that she intends to blame Brexit for part of her fiscal shortfall, pointing to an expected productivity forecast downgrade by the Office for Budget Responsibility, the independent forecaster.

“The OBR, I think, are going to be pretty frank about this — that things like austerity, the cuts to capital spending and Brexit have had a bigger impact on our economy than was even projected back then,” she said.

“That is why we are unashamedly rebuilding our relations with the EU to reduce some of those costs, that in my view were needlessly added to businesses since 2016 and since we formally left a few years ago.”

The choices that Reeves makes about Budget tax rises will have a direct impact on inflation — economists say that increasing income tax rates would be more likely to curb inflation than raising value added tax, which will feed through to higher prices.

Some Labour officials believe that Reeves will break an election manifesto commitment and increase income tax rates in the Budget to close the fiscal gap, estimated at between £20bn to £30bn, and to build in increased “headroom” against her borrowing rules. 

One senior Labour figure said that putting up income tax was increasingly likely because it was a straightforward — albeit politically painful — way to raise more revenue in a single policy.

“It’s like taking a single punch to the face rather than a thousand cuts over a long period,” they said. Another senior government official declined to rule out such a move, saying only: “No decisions have been taken.” 

The Treasury, asked about a possible income tax rise, pointed to Reeves’ previous comment that “the manifesto stands”.

Jack Meaning, UK chief economist at Barclays, said last week that freezing income tax thresholds or raising income tax rates would have a smaller impact on growth than a VAT rise or new increases in duties and regulated prices.

Because higher income taxes would weigh on consumer demand, inflation could ease relatively quickly, giving the BoE scope to cut rates, he said. 

Among the revenue-raising options on the table at the Treasury are a widely expected freeze on income tax allowances and NICs thresholds for another two years to 2029-2030, which according to Michael Saunders at Oxford Economics would raise £10bn.

An increase in the basic rate of income tax by 1p would add £8.2bn to revenue by 2028-29, according to HM Revenue & Customs estimates. Lifting the higher rate by a penny would boost revenue by £2.1bn and raising the additional rate by a penny would raise £230mn.

Official figures showed on Tuesday that the UK borrowed almost £100bn in the first half of the financial year, the highest sum since the pandemic, underscoring the fiscal challenges facing Reeves.