The Monetary Policy Committee: Interest Rate Announcement ahead of the 2024 General Election

On Thursday 20 June 2024, just two weeks before polling day, the Bank of England’s Monetary Policy Committee will make an announcement about the Bank Rate, the much-discussed and much misunderstood interest rate at which the Bank lends to commercial banks. It will likely be the biggest economic moment in the campaign, casting a spotlight on the Conservative’s record on the economy, and could prove pivotal to the race.

Following news that inflation had fallen to 2.3 percent in the 12 months to April 2024, speculation is rife that the MPC might finally commit to a rate drop from the 5.25 percent high held since August 2023. With discussion already rampant in Parliament over the last year about the power wielded by the Monetary Policy Committee, will it prove to be the inadvertent kingmaker of General Election 2024?

Understanding the Bank Rate

The Bank of England’s Monetary Policy Committee (MPC) consists of nine members: the Governor of the Bank of England, the Bank’s three Deputy Governors, the Bank’s Chief Economist, and four external members who are appointed by the Chancellor of the Exchequer. The first MPC was created by the Bank of England Act 1998 when the new Labour Government decided that monetary policy, previously the responsibility of the Treasury, should be decided independent of political interference. The MPC was given the power to set the Bank Rate in order to meet an inflation target, set by the Government. Since 2004, that target has been set at two percent as measured by the Consumer Price Index (CPI) (between 1997 and 2004 it was 2.5 percent as measured by the Retail Price Index or RPI).

Navigating Inflation Challenges

Inflation began to climb above the Bank’s two percent target in May 2021, as the economy started to emerge from a year of lockdowns. When Russia invaded Ukraine in February 2022, UK inflation had already climbed above five percent, and it hit a peak of 11.1 percent in October 2022 when then-Chancellor Kwasi Kwarteng announced his disastrous “mini-budget”. Eyes turned to the MPC for a remedy. An increase in the Bank Rate, the interest rate at which the Bank of England lends to commercial banks, in turn increases the interest rate that commercial banks charge their customers: businesses and consumers. Increasing the cost of borrowing discourages consumer and business spending and encourages more saving, dampening demand and slowing inflation, but also restricting economic growth.

High Inflation and the Cost-of-Living Crisis

High inflation erodes real incomes, causing a cost-of-living crisis and leaving many families and businesses struggling, so getting it down has been a key priority of the Government and the Bank of England. And so, from a historically low Bank Rate of 0.1 percent in November 2021, the MPC began to hike up interest rates to counter inflation. They moved slowly at first, increasing the Bank Rate to 0.25 percent in December 2021 and 0.5 percent in February 2022. By December 2022 it had reached 3.5 percent and in August 2023 it had hit 5.25 percent where it has since remained. For the last six MPC meetings, the members voted to maintain the Bank Rate at 5.25 percent.

However, there has been no consensus on the correct course of action. Politicians and stakeholders alike have called for the Bank Rate to be reduced due to its dampening effect on economic growth, accusing the MPC of moving too slowly. Yet the MPC has also faced criticism for not hiking rates high enough or fast enough in the beginning to prevent the cost-of-living crisis. At the last announcement of the Bank Rate on 9 May 2024, the MPC softened its rhetoric slightly and indicated that it would consider a rate drop over the summer if indicators suggested it was advisable. On 22 May 2024 it was announced that inflation had hit 2.3 percent, nearing the two percent target, fuelling speculation that a rate drop is on the horizon.

The MPC and General Election 2024

The MPC will announce their next Bank Rate decision on Thursday 20 June 2024, just two weeks before polling day. A rate drop will be seen as an indicator that inflation has been brought under control, and that the focus can shift away from reducing inflation and towards economic growth, all good news for the Conservatives. The Conservatives will treat a rate drop as an A on their economy report card, and will ramp up messaging that their plan for the economy is working, urging the country to give them a chance to continue down this path. Indeed, it seems the Prime Minister timed the election to coincide with news that inflation was falling and the country was no longer in technical recession. Perhaps he was banking on a rate drop as his best chance of bridging the polling gap.

Labour’s Stance

Labour, meanwhile, will likely continue to accuse the Conservatives of “gaslighting” the country if a rate drop does occur, insisting the news is nowhere near as rosy for people still feeling the pinch after years of high inflation and low growth. However, there is no guarantee that a rate drop is on the agenda. The MPC may wait until later in the summer and may want to see further data to be sure that inflation is fully controlled. The independent MPC will pay no heed to the political situation, proceeding with the decision it feels will protect the UK’s economic stability and reach the two percent inflation target. Another decision to maintain at 5.25 percent will be weaponised by Labour to claim that nothing has changed in the economic outlook and the Conservatives cannot be trusted with the economy.

Meanwhile, another decision to maintain will likely rile up Conservatives. Senior figures, including Jacob Rees-Mogg, have already attacked the MPC for, in his mind, damaging the economy with their interest rate decisions. Voices from the right, critical of the Bank of England, will only get angrier and louder if the Conservatives cannot capitalise on some good news for the economy.

Either way, the 20 June will be a flash point over the economy in this election campaign. We can expect both sides to roll out their Treasury Ministers and Shadow Ministers in an attempt to make either decision – a rate drop or maintain at 5.25 percent – work with their economic narratives. No matter the decision, the MPC will be under scrutiny like never before. The staunchly independent Bank of England will see its name dragged into fierce political conversations, whether it likes it or not.

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