Rachel Reeves has suffered another blow in her bid to boost tepid economic growth after the Bank of England played down the idea of a big interest rate cut later this year.
Huw Pill, the Bank’s chief economist, pointed to a more “careful” approach instead.
His comments came just a day after the bank’s decision to halve its growth forecast overshadowed news of a smaller interest rate cut.
In another setback for the chancellor, the Bank also warned inflation is now expected to rise higher than previously estimated, to 3.7 per cent, and more people will be out of work, as firms deal with higher taxes and an increase to the minimum wage.
The growth downgrade was described as a “wake-up call” for Ms Reeves, whose future in the role is being questioned.
Asked on Friday whether the Bank could cut UK interest rates by half a percentage point, as two policymakers voted for this time around, Mr Pill pointed to higher-than-expected pay growth of 3.7 per cent.
He said the growth was “a little bit higher than we had expected, and maybe it’s still a little bit higher than we would see as consistent with achievement for the inflation target”.
“I think that is a reason for caution, for carefulness in the way we proceed with removing monetary policy restriction and cutting bank rate,” he added.
He also warned that when it comes to inflation, “we’re not in a situation where we can declare ‘job done’”.
On Thursday, the Bank announced a cut in interest rates from 4.75 per cent to 4.5 per cent.
The move will provide relief for businesses, as well as hundreds of thousands of people with mortgages who will see their monthly payments fall. A homeowner with a £300,000 tracker mortgage will see monthly repayments drop around £43 from £1,710 to £1,667.
It was the first piece of good news in some time for a chancellor who insists growth is the government’s number one mission.
But Paul Johnson, director of the Institute for Fiscal Studies (IFS), called the downgrade update a “pretty pessimistic forecast”.
“The Office of Budget Responsibility (OBR) is generally much more optimistic than the Bank but if it moves in a similar direction, that will spell trouble for the chancellor,” he wrote.
In his assessment, Bank governor Andrew Bailey warned that Donald Trump’s threatened US trade tariffs, even if not imposed directly on the UK, could hit growth.
