The Bank of England has kept interest rates on hold as it warned of growing economic uncertainty linked to Donald Trump’s trade war.Â
The central bank’s monetary policy committee, which meets every six weeks to set borrowing costs, voted 8-1 to keep the bank rate unchanged at 4.5%.
Although the decision was widely expected, the vote was more unified than many assumed.
Just one member of the committee, Swati Dhingra, voted to cut rates by 25 basis points. In what may come as a surprise to some, Catherine Mann, who voted for an outsized 50 basis points cut last month, opted to hold.
The Bank kept its guidance unchanged, pointing to “a gradual and careful approach” to rate cuts, but warned it was prepared to keep borrowing rates higher for longer if wage and price growth continues to persist.
Concerns about constrained supply in the economy – which limits the economy’s ability to grow without sparking inflation – have been playing on policymakers’ minds.
The Bank echoed these concerns again today, alongside warnings about “second-round effects” from higher wages and prices, which could cause inflation to spiral. “This would warrant a relatively tighter monetary path,” it said.
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Trade war concerns
Central bankers said they were also contending with an increasingly uncertain global outlook.
In minutes of the meeting published alongside the announcement, the Bank said: “Since the MPC’s previous meeting, global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded.
“Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally.”
The Bank was relatively sanguine about the impact of Trump’s tariff policy on the economic growth in the UK but said it could not be certain about the consequences for inflation.
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Last night the US Federal Reserve kept its key borrowing rate on hold while downgrading growth forecasts and upgrading its inflation projections.
Central bankers in the UK are also contending with heightened policy uncertainty – both at home and abroad – which means they have been cautious in their approach.
The Bank started cutting rates in August but, since then, it has reduced the bank rate just three times as policymakers evaluate a mixed economic picture.
Along with fears about supply constraints in the economy, inflation has climbed back above the Bank of England’s 2% target and wage growth continues to outstrip inflation.
Average weekly earnings, including bonuses, did cool from 6.1 % to 5.8% in the three months to January but the figure is still considerably higher than the inflation rate of 3%.
Central bankers keep a close eye on wage growth as they fear wage pressures fuel price pressures in the economy.
Inflationary pressures still exist in the economy but the Bank is balancing that against signs of an economic slowdown.
The economy contracted by 0.1 % at the beginning of the year and the labour market is cooling. Recruiters are warning of a sharper slowdown when the chancellor’s national insurance contribution increases kick in next month.
The Bank of England reiterated this today, warning that business surveys “generally continue to suggest weakness in growth and particularly employment intentions”.
Where to for inflation?
There are also reasons to be sanguine on inflation.
While the headline rate jumped to 3% in January, the increase was driven by one-off factors and base effects, including VAT on private schools and a jump in airfares because of a shift in the timing of the Christmas holidays.
Food inflation also rose but food prices can be volatile.
The Bank is more interested in services inflation, which gives a better indication of domestically generated pressures. This came in at 5%, which was below the Bank’s forecast.
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While the headline rate is expected to hit 3.7% by the summer, policymakers have indicated that this is likely to be a bump in the road – driven by a temporary jump in energy prices and rising water and council tax bills from April.
While these will eventually drop out of the inflation rate calculation, that will offer little relief to consumers who will still have to contend with a sustained rise in the price level.
