Simon Pittaway

The MPC's 5-4 split today continued a rising tide of dissenting votes from internal BoE members.

Last year, one-in-five votes cast by internals went against the majority decision - the highest rate of internal dissent since 2005.

This is good! A sign of active debate among the committee.

The dovish surprise in today’s vote – with 4 members voting for a cut, rather than the expected 2 – signals an increased chance of future cuts. The dovish case is clear in the forecasts too (see charts ⬇️).

If these signs of weakness continue, the case for more rate cuts will only grow.

What does all this mean for interest rates?

Since the MPC’s last meeting, markets have raised and then scaled-back their expectations for rate cuts this year. Nearly two cuts were priced in around mid-January. But in recent days the odds of a second cut were around half.

In the long run, real wage growth can only be sustained if productivity is growing too.

Here, the Bank still expects a gradual recovery in productivity growth. Looking ahead, it appears marginally more optimistic than the OBR – but note that the OBR thinks potential output is higher today.

Unchanged wage growth + less inflation = stronger real wages.

The Bank projects more than twice as much real pay growth in the next three years (3.5%) as the OBR does over the next five (1.6%). If the Bank is right, that's a much rosier outlook for living standards.

The backdrop here is pay growth appearing to settle around 3% in recent data - traditionally a level consistent with 2% inflation target. If it holds, it should give space for quicker cuts. Indeed, the two surprise voters for a cut (Breeden & Ramsden) both cited this in their reasoning.

On wage growth, the Bank’s near-term forecast for private-sector regular pay is basically unchanged in the near term: it still sees AWE easing to around 3.2% by the second quarter of this year.

The Q2 drop in inflation is mainly an energy story, but there also been some broader good news here. Services inflation – a key measure of domestically generated price pressure – has been consistently lower than previously forecasted, and this weakness is projected to continue.

Lower wholesale prices and cost-of-living support mean that energy bills will be pulling down headline inflation from April.

Inflation is forecast to be back at 2% by June - nearly a year earlier than previously thought.

Look, I know there's a lot going on in the news right now. But the MPC decision today was actually quite interesting!

They were only one vote away from delivering a cut that wasn't on the cards at all, and they now think inflation will not just drop sharply this year but stay low.

Thread below ⤵️

The MPC delivers a bit of a dovish surprise, holding Bank Rate at 3.75% only by a narrow 5-4 margin. Markets were expecting a clear-cut 7-2 vote.

There will be lots of unpack on the Bank’s latest outlook for the economy and the future path of interest rates.

Why your mortgage bill might rise as rates fall.. Senior Economist Simon Pittaway on 2026's mortgage mystery: how can mortgage bills go up while the Bank continues to cut rates?

As interest rates fall, why is Britain’s average mortgage bill set to keep rising in 2026?

In our latest Substack, @simonpittaway.bsky.social unpacks the weirdness of this interest rate cycle. ⬇️

buff.ly/EEQ99bZ

Very kind, thank you!

A league of their own • Resolution Foundation What is driving the US’ impressive productivity outperformance? How does it differ from the UK, and what lessons can be drawn? And what can firms and policy makers do to reverse the UK’s productivity ...

And you can also tune in to hear me discuss this work (and much more I'm sure) with @jasonfurman.bsky.social
and the Bank of England's Clare Lombardelli at our event this afternoon.

www.resolutionfoundation.org/events/a-lea...

Yanked away • Resolution Foundation Britain’s record of productivity growth in the 2010s was dismal. But halfway through the 2020s things appear to have got worse not better, with official data likely understating the scale of Britain’s...

For much more on all of this see the report published this morning.

www.resolutionfoundation.org/publications...

🏢 Dynamism: non-residential Stamp Duty is a tax on business reallocation and badly needs reforming. Reforms could be funded by cutting the VAT registration threshold to £30k, which would raise £1.5bn+ and remove a disincentive for small firms to grow.

🌐 Innovation: free trade boosts innovation by exposing domestic businesses to ideas from aboard and increasing the potential rewards from innovating. The imposition of tariffs by the US underscore the need to pursue trade agreements elsewhere.

💷 Investment: the government should bring software in scope of full expensing - allowing businesses to offset their investment against their tax bills, as they already can with lots of physical investment.

The lessons for policy are clear: we need to raise business investment, boost innovation and reverse the long-run decline in business dynamism. Of course, none of these are directly under policy makers’ control, but there are things we can do to shift the odds in our favour.

Finally, another potential explanation for the strength of US services is an uptick in business dynamism. Covid shook up the US economy in a big way, and there has been a long-lived uptick in labour reallocation and business formation – which hasn’t been matched in Britain.

Look at the type of investment, tech adoption seems to play a major role. Either side of the pandemic, American businesses increased spending on software twice as quickly as their British counterparts. We see a similar pattern in related investments like ICT and R&D.

This pattern of outperformance is consistent with a concentrated investment slowdown since the Brexit referendum. In key service sectors, investment has now fallen so low that it only just offsets deprecation – i.e. these sectors' capital stock in didn’t grow in 2023.

3️⃣ Tech-using sectors are key

America’s growing advantage in services isn’t confined to the tech (ICT) sector. Professional services account for 2x as much of the recent productivity divergence. In reality, the US has outperformed the UK in a range of key service sectors.

But, surprisingly, the US’s growing productivity advantage has been concentrated in less energy-intensive service sectors.

This isn’t to say energy prices don’t matter, but other factors have been more important in explaining sectoral productivity growth in recent years.

2️⃣ Energy prices??

The UK has seen a massive spike in energy prices since 2019. Industrial gas prices rose by 158% between 2019 and 2023, compared to a 21% rise in the US. And because we’re so gas-dependent for electricity generation, electricity prices rose sharply too.

The mining and quarrying sector (of which oil and gas is the main part) accounts for 1/6th of the post-pandemic productivity divergence between Britain and America, despite being less than 2% of GDP in both countries.

1️⃣ Oil and gas

Production keeps booming in America while dwindling in Britain. Hours are sticky though: workers in UK mining and sector clocked the same number of hours in 2019 as they did in 2005, despite extraction falling ~50%. Less output + same hours = falling productivity.

Britain isn’t alone in its recent struggles. In the G7, Canada, France and Italy have all seen productivity fall since Q4 2019. But (up until now at least) America has been in a league of its own.

In the paper, I set out three things to know about the recent US-UK divergence in productivity.

What we've seen is growth slowing across most of the UK economy. A notable slowdown has been in Info & comms, the main source of productivity growth in the 2010s. It’s still contributing more than any other sector to aggregate productivity growth, but only half as much as before.

This partly reflects measurement difficulties, as labour productivity in healthcare doesn’t capture quality improvements. But even if we used NHS England’s quality-adjusted measure of acute care productivity, overall UK productivity would have grown just 0.3% from 2019 to 2024.