UK interest rates will go down gradually, says Bank of England

The Bank of England has issued a warning, stating that economic and global trade uncertainty has escalated, prompting the institution to maintain UK interest rates at 4.5%. This decision was widely anticipated, with Governor Andrew Bailey emphasizing that rates are still on a downward trajectory.

The ongoing US trade tariffs and retaliatory actions from entities like the EU have contributed to the prevailing uncertainty for nations, according to the Bank. Economists are anticipating two more rate reductions by the year’s end, with many speculating that the next cut may occur in May.

Mr. Bailey reiterated the Bank’s responsibility to ensure that inflation remains stable and low. Presently, inflation stands above the Bank’s 2% target at 3%. The Monetary Policy Committee (MPC), responsible for setting rates, voted by a majority of eight to one in favor of maintaining the rate at 4.5%.

The base interest rate influences the rates established by High Street banks and lenders. The relatively elevated level in recent times has translated to increased costs for borrowing money, such as mortgages and credit cards, while also providing savers with improved returns. Approximately 600,000 homeowners have mortgages linked to the Bank’s rate, meaning the recent decision will not have an immediate impact on their monthly repayments.

Despite inflation being lower than in previous years, households are still grappling with higher prices and are bracing for increased bills for essentials like water, energy, and council tax from April. Statistics from the Office for National Statistics reveal a 2% rise in direct debit failures in February compared to January, partly driven by individuals missing loan and mortgage repayments.

Trade tariffs imposed by the US pose a threat to UK businesses exporting goods to America. The Bank noted that most firms are in a “wait and see” mode, particularly with the impending hike in National Insurance contributions next month. UK exporters are reportedly apprehensive about the potential impact of tariffs.

President Donald Trump’s imposition of tariffs on imported goods has sparked a trade war with key trading partners, such as the EU and Canada. The Bank highlighted that more firms are pausing or freezing hiring due to tax hikes, leading to a reduction in investment plans. Pay growth for workers is also anticipated to ease over the year.

The Bank has implemented three rate cuts since August 2024 following previous hikes to combat high inflation driven by energy and food price surges in the aftermath of the Covid pandemic and the war in Ukraine. Mr. Bailey expressed the Bank’s projection of a slight rise in inflation this year, gradually tapering over time.

There is a delicate balance in increasing interest rates to tackle inflation, as it could deter spending and impact demand for goods. The Bank forecasts inflation to climb to 3.7% this year, remaining above the 2% target until the end of 2027. The institution slashed its economic growth estimate for the year, a setback for the government’s economic growth agenda.

Chancellor Rachel Reeves emphasized the need to alleviate the cost of living, pledging to accelerate efforts to jumpstart economic growth. Conversely, shadow chancellor Mel Stride attributed the persistent inflation to Reeves’s October Budget. Liberal Democrat treasury spokesperson Daisy Cooper urged Reeves to reverse the decision to raise NICs for employers, citing a stifling effect on economic growth.

In conclusion, the Bank of England’s decision to maintain interest rates reflects the prevailing economic uncertainties and the challenges posed by global trade dynamics. The institution remains vigilant in its commitment to ensuring stability and fostering economic resilience amidst evolving market conditions.