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I'm joined in Westminster by Michael Saunders, former Bank England policymaker and now a senior advisor at Oxford Economics. Lovely to have you back, Michael. We had that inflation reading yesterday two point three percent. Richie Seene access inflation is back to normal. The financial markets reckon it's so sticky a June rate cut is off the table.
Who's right? I think a June rate cut is looking very unlikely after the inflation figures. The decision to call the election won't really alter that, other than in a very limited extent. The NPC would be especially reluctant to do a surprise rate change during an election campaign. I think that they would prefer not to do anything which, by their own actions would be a cause for the utility. Look in practice, a June rate cut is probably ruled off by the inflation figure.
So will there be any worry on the NPC about looking as if they're giving a helping hand to the government.
I think it's rather that with the inflation figures come out higher than expected, they don't have the evidence to cut rays for now. But also, you know, there's no great rush. They can afford to wait for a bit more data to come through, and as I said, they themselves wouldn't want to be a cause for volatility.
Do you expect more members of the Military Policy Committee or former colleagues to join Swatty, Dinger and Dave rams And and voting to cut in June?
Possibly? But actually I think unless the May inflation figures, which hall still come out before the June meeting, are especially low, I think it is more likely that they would wait until August that the NPC has set out the conditions for lower interest rates, that pay and prices had to come down more or less in line with
the forecast in the May Monetary Policy Report. So far the news has been a little bit higher than they're expected, So it's really the evidence which you would need to see to change before the NPC members votes would also change their.
Services inflation particularly sticky. What would be a healthy level to start to cut.
I think it's fair to cut rates gradually before pay growth and services inflation are back to target consistent rates. So a target consistent rate of pay growth would be about three and a half. Services inflation probably about the same kind of pace. As long as you're reasonably sure you're on a path to that, then you can start to cut rays gradually. Conscious that the lags on Mountree policy are quite long and therefore if you wait until everything is sorted, you've probably left it too late.
And just thinking again about the election, does kir Starmer if he wins, have the fiscal room to grow the economy significantly in five.
Years, Well, this is going to be the big challenge for whoever's in government for the next few years. The UK has low potential growth, which means the trend growth of tax revenues is quite low. There's strong pressures for higher public spending from the aging population and increase need for defense spending. And we've got to get the public finances back onto a sustainable path. Now, trying to reconcile those three is going to be a difficult task for
whoever's in government. The best way to do it is to do measures which can raise the economy's potential growth. Then tax revenues will be stronger, the public finances will improve, and you'll have more money to spend on public services.
Of course, growth is something that both parties agree we need. We haven't had the election manifestos yet. But knowing what we know so far about Labour's plans, do you think that financial markets will be worried by their a new change of gomnum? So?
I think financial markets and international businesses will be extremely relaxed about the prospect of a change to a Labor government. Now that's partly because Labor themselves are viewed as a moderate centrist party. It's also because the Conservatives have perhaps lost their previous claim to be the party of economic competence after the chaotic period of the last few years.
We've had you know, five prime ministers, seven chancellors. Honestly, I've lost track of the numbers of business secret faries, housing ministers and industrial strategies. So you know, I think probably investors would perhaps breathe a sigh of relief.
And I mean you rub shoulders with these business leaders all the time, they're your clients. Do you think that Labor has now become the party of business.
To an extent? Yes? I think yes, I think that they've made quite a mark shift in the last few years. But it's also, as I said, that the Conservatives have forgone their previous claim to be the party of business. Of economic competence and.
Hasn't recovered that.
I don't think really. No GDP per head in the UK, which is a key drive of living standards, is still lower than it was in twenty nineteen. Now, I mean I wouldn't call that a successful economic strategy.
Okay, what the one economic policy then that you would advise any party to put in place that would make a significant difference in their manifesto.
So I'm going to cheek slightly and I'm going to go for three closer trade links with Europe, hire public investment and build more houses.
And the housing policy of care Starmer. Do you think that that will or or the Conservative Party do you think that it will make much of a movement in the housing market.
Well, the key thing is to make it easier for people to buy a house and thereby move to where the jobs are, and that's improvement in labor mobility would help businesses to hire, to invest and improve the economy's potential growth rate. Now, the Conservatives have at times talked of higher house building, but actual house building has been really low. So a government which puts higher house building as one of its key aims, I think that would help to improve the economy's long run.
Potential, would it lower prices there?
It would lower prices, but the mechanism is to make it easier for people to move to seek job opportunities, and that helps firms to hire, helps businesses to invest, allows new opportunities to expand.
Okay, Michael Saunders, Economic advisor at Oxford Economics, with a little view on what we might be able to expect from the election manifestos from both parties, will wait for them to come up