In a month where the Middle East conflict rumbled on without conclusion, there was one major economic change announced in mid-September. The Fed hiked interest rates by 0.25%, the first increase since 2023. Whilst the Bank of England held, the European and Japanese Central Banks also raised their rates.
Andy Burnham used his platform at the Labour Party Conference in Liverpool to announce some politically controversial policy changes.
Bond markets are increasingly unsettled, and whilst political speeches and the forthcoming Autumn Statement are easy targets for blame, the long-term global problem is increasing interest rates and competition over supply from capital markets who are now lending huge sums to AI companies, alongside ongoing fears of inflation from the Middle East conflict. On 1st October the yield on 30-year UK gilts hit 6% for the first time since 1998.
Neither the UK nor the US have run a surplus since 2001. Whilst this is a problem Chancellor John Healey has inherited rather than created, it creates more pressure on him ahead of the Autumn Statement to either raise more revenue through taxes, or cut spending, to appease bond markets.
UK
The Bank of England’s Monetary Policy Committee (MPC) voted by six to three to hold the Bank Rate at 3.75%, the Bank announced on 17 September.
The Bank said conflict in the Middle East had pushed energy prices higher since its July forecast, with the spot prices of Brent crude oil and UK wholesale gas up 36% and 78% respectively. Inflation, as measured by the consumer prices index (CPI), rose to 3.1% in August. The Bank estimates that energy, mostly motor fuel, accounted for around 0.7 percentage points of the 1.1-point gap above its 2% target.
Governor Andrew Bailey commented: “So far, higher global energy costs have had a limited effect on price and wage setting in the UK. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target.”
Bank staff now expect CPI inflation to reach around 3.75% in the last three months of 2026, up from the 3.2% they forecast in July, and slightly above 4% early in 2027.
The three members who voted for a rise argued that the peak would coincide with next year’s pay negotiations and raise the risk that higher prices feed into wages. The majority judged that a soft employment market and higher borrowing costs would hold inflation back for now.
The Bank said quoted rates on two-year fixed mortgages were around 0.95 percentage points higher than before the conflict began. Financial markets were pricing Bank Rate to peak at around 4.9% by the end of 2027, the minutes show, although most respondents to the Bank’s survey of market participants in early September expected a prolonged hold.
The MPC announces its next decision on 5 November, a week after Chancellor John Healey’s Autumn Statement. Prime Minister Andy Burnham used his first Party Conference speech as Party leader to trail one major policy decision in advance of the Autumn Statement.
As you might expect at a party conference, the speech was more about vision than detail, but the one bit of detail that caught the attention of the media was a change to the state pension triple lock. The immediate press assertion that the triple lock was being removed is a little overstated, it is being tweaked rather than removed altogether. However, it is a politically dangerous move by the PM, who will be aware of how any change will be used against him.
This will not change until 2030, after the next general election, should Labour win it. At this point it will instead track average earnings over time, rather than every year. This smooths out the impact of short-term increases in average earnings, in what Burnham called an “adjusted triple lock”.
The triple lock was introduced in April 2011, by the Tory-Lib Dem coalition government, to ensure the UK State Pension rises annually by the highest of inflation, average earnings growth, or 2.5%. Many economists now view this as unstainable, and unfair to younger generations who are supporting a growing ageing population through increasing taxation. The Institute for Fiscal Studies (IFS) has warned that by the 2070s, pension spending could rise by around £80 billion in today’s money, with more than half of this increase attributed to the triple lock mechanism. They suggest that in a more volatile economic environment, the policy could cost an extra 1.5% of national income, roughly £44 billion in 2025 terms.
People approaching or in state pension age are a powerful voting bloc, and as a result most major parties will commit to retaining the triple lock for political reasons, regardless of the economic arguments.
The state pension will still be increased by the highest of three measures; inflation, average earnings growth over time, or 2.5%. It is impossible to know what difference this will make in future and any numbers quoted are based on the sort of economic assumptions that rarely make it into reality. Burnham asserted that this change is likely to save £15bn by 2040, but this is mostly guesswork for that very reason, and £15bn is unlikely to fund his new National Social Care Service alone and could cost him his job.
