BoE: Holds rates steady at 4.5%
The Bank of England (BoE) is playing it safe, holding interest rates steady at 4.5% amidst growing worries about global trade uncertainty. They’ve paused interest rate cuts for now, but haven’t ruled out future reductions, opting to wait and see just how persistent inflation will be in the UK economy over the coming months.
According to BBC reports, the majority of the BoE’s Monetary Policy Committee (MPC) – a strong 8 out of 9 members – voted to keep the rate as it is. Only Swati Dhingra dissented, advocating for a slight decrease of a quarter-point.
BoE Governor Andrew Bailey hinted at possible future relief, stating, “We still anticipate that interest rates will gradually come down,” suggesting that further cuts could still be on the table later this year.
Inflation Concerns Loom Large for the BoE
This decision to maintain rates follows a small rate cut in February. Back in February, the central bank also adjusted its economic outlook, slightly lowering its growth forecast for 2025 from 1.0% to 0.75%.
The MPC’s meeting notes echoed their February stance, emphasizing that any future rate adjustments would be “gradual and careful,” and stressing that monetary policy isn’t locked into a predetermined course. Interestingly, the possibility of a rate cut in May was discussed during the meeting, though ultimately not confirmed.
For these policymakers, inflation remains the primary issue. In fact, the BoE has slightly increased its peak inflation forecast for 2025 to 3.75% in the third quarter, up from the previous 3.7% estimate. It’s worth noting that UK inflation was at 3% in January, still significantly above the central bank’s target of 2%.
On a slightly brighter note, the central bank has also revised its economic growth forecast for the first quarter of 2025 upwards to 0.25%, from an earlier estimate of 0.1%.
A recent survey conducted by the BoE’s network of agents reveals a concerning trend: more businesses are freezing hiring, and some are even considering job cuts if the UK economy doesn’t pick up pace soon.
“The Bank of England finds itself in a tough spot,” commented JPMorgan market analyst Zara Nokes, “balancing persistent inflationary pressures with a fragile economic outlook.”
Global Trade Uncertainty Clouds Monetary Policy
The BoE’s decision mirrors the US Federal Reserve’s move just a day earlier, where they also held rates steady. The Fed also lowered its growth projections from 2.1% to 1.7% and increased inflation forecasts to 2.7%, a slight 0.2% rise from December predictions.
“We’re not going to rush into any changes,” Fed Chair Powell stated to reporters on Wednesday. “Our current policy approach is well-suited to handle the risks and uncertainties we’re facing. The prudent course of action is to wait for a clearer picture of the economy’s direction.“
UK officials believe that global trade tensions have intensified due to recent US tariffs and subsequent retaliatory measures from other nations in Europe and Asia.
Domestic policies in the UK are also playing a role in the BoE’s cautious approach. The MPC specifically pointed to an upcoming tax increase on employers as a factor contributing to rising prices within the services sector.
Following the MPC vote, traders in the financial markets slightly adjusted their expectations for a May rate cut, with the probability dipping from 60% earlier in the day to just under 50%. However, markets still largely anticipate two rate cuts to occur before the year is out.
The yield on two-year UK government bonds, which closely reflects interest rate expectations, edged up to 4.1%, recovering from a low of 3.8% earlier in the day. The British pound also reacted subtly, inching higher to $1.29 and reducing its earlier losses to 0.4%.
Looking Ahead: Future Interest Rate Expectations
Another key event on the central bank’s horizon is Chancellor Rachel Reeves’ upcoming budget update next Wednesday. Reeves is expected to announce reductions in public spending, which could have a significant impact on the UK’s economic path.
Shadow Chancellor of the Exchequer Mel Stride openly criticized the BoE’s decision to hold interest rates, warning it would mean “higher mortgage costs for millions of households.”
Stride argues that Chancellor Rachel Reeves’ previous budget is to blame for pushing inflation above the central bank’s target, making it harder to bring interest rates down.
Stride urged the Chancellor to prioritize “managing public spending, borrowing, and debt,” asserting that sound fiscal policy is the key to creating the right conditions for the BoE to lower interest rates in the future.
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