UK’s Reeves Tells BOE That Lowering Inflation Is Goal of Budget

Rachel Reeves Photographer: Dan Kitwood/Getty Images Photo by Dan Kitwood /Photographer: Dan Kitwood/Getty

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(Bloomberg) — Chancellor of the Exchequer Rachel Reeves said the UK government was looking at measures to reduce inflation when it publishes its next budget in November. 

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In an exchange of letters with Bank of England Governor Andrew Bailey, Reeves said inflation was “too high” and added that “the prime minister and I recognize that we must do everything in our powers to keep costs down and lower them.” The chancellor and governor are required to correspond when inflation is more than 1 percentage point above or below the 2% target.

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“We have asked Cabinet to work with their officials to look at what further action can be taken ahead of the budget in November,” she said, referring to the most senior politicians in government. 

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Inflation is 3.8%, above the BOE’s 2% target and on track to rise to 4% next month, according to the bank’s forecasts. Its Monetary Policy Committee voted 7-2 to hold rates at 4% on Thursday as it continues to bear down on prices. 

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UK interest rates are the second highest in the Group of Seven advanced economies after the US. In his letter to Reeves, Bailey said the spike in inflation was likely to be temporary, largely due “to food prices and administered prices, including water bills and Vehicle Excise Duty.”

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Reeves has been blamed for stoking inflation with her budget last year, when she hit business with a £26 billion ($35 billion) payroll tax and pushed up the minimum wage. Companies say they had little option but to pass the costs on and have urged her not to impose further costs on them in November.

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Bailey recognized the problem in his letter, saying: “A reduction in total labor cost growth also appears to have been delayed by the increase in employer National Insurance Contributions and pay growth in sectors with a large share of employees at or close to the National Living Wage.”

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Reeves is looking at reducing the 5% VAT on household energy bills to zero in an effort to bring down prices, the Sunday Times reported. The BOE fears higher prices, particularly food where households notice price changes and inflation is running at 4.8%, will lead to second-round effects that keep inflation high for longer.

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“Low and stable inflation is essential for long-term economic growth and sustained increases in living standards,” Reeves added in her letter to Bailey. “I acknowledge your assessment of the reasons for this temporary increase in CPI inflation.”

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