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UK in focus: A plethora of policy updates

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March saw policy updates from both the government on fiscal policy and the Bank of England on monetary policy. Economic data starts the year on a better footing, with positive growth and a falling rate of inflation but wage growth and services inflation remains too high for interest rate cuts just yet.

March treated us to the latest updates from both the government on fiscal policy and the Bank of England (BoE) on monetary policy. The beginning of the month saw Chancellor Jeremy Hunt’s latest Spring Budget, the last of the parliamentary term. Unfortunately for Mr Hunt, there was no magic money tree as there was in the Autumn Statement, due to a softer economic growth outlook and a lower forecast profile for the rate of inflation, relative to last November. Therefore, in order to offer the headline announcement of a 2p cut in National Insurance Contributions, the Chancellor had to also announce a series tax rises as well as accept an even smaller margin of error (GBP9bn down from GBP13bn in November) to achieve his fiscal targets - notably, debt falling as a share of GDP in five years.

For businesses, the announcements were sparse. Beyond the usual fuel duty freeze, which has been extended since its incorporation over a decade ago, the Chancellor announced: the Growth Guarantee Fund, a GBP200mn fund to support the growth of businesses with a turnover <GBP45mn: an expansion of full expensing to leased assets: a rise in the VAT threshold to GBP95k: and an extension to the freeze in alcohol duty until February 2025.

However, the future of public finances is precarious with the forecasts predicated on significant real-term cuts to public sector spending and an increasing tax burden. Therefore, for whichever party wins the next general election, achieving a prosperous economy will be paramount to meeting their fiscal targets.

Graph showing forecast for interest rates

Bank of England policy update

The Bank of England’s Monetary Policy Committee (MPC) opted to leave Bank Rate unchanged at 5.25% at their March policy meeting. The notable development came from how the nine-strong committee voted: this was the first policy meeting since September 2021 where no member opted for an interest rate hike. Instead, eight members voted to leave Bank Rate unchanged while one member preferred an interest rate cut.

However, despite a more collegiate decision on policy, the committee remain split on the degree to which persistent inflationary pressures have receded, and therefore require “further accumulation of evidence on inflation persistence … to warrant a shift in the monetary policy stance”. The MPC maintained its guidance of closely monitoring the underlying tightness of the labour market, wages and services inflation but added a recognition that with interest rates at their current level, monetary policy was weighing on activity and inflationary pressures. Therefore, financial markets currently expect the first cut in interest rates to be in June.

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