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Bank of England holds interest rates at 4.5% amid fears over stubborn inflation Bank of England says companies freezing hiring plans as it keeps interest rates on hold
(32 minutes later)
Central bank pauses rate cuts as UK economy struggles and Trump tariffs hit world economy Rate-setting committee also points to mounting global uncertainty as it pauses its cycle of reductions
The Bank of England has kept interest rates on hold at 4.5% amid rising global uncertainty and concerns over stubbornly high inflation. The Bank of England has said UK businesses are freezing their hiring plans in response to Rachel Reeves’s tax increases and to mounting global uncertainty as it kept interest rates on hold at 4.5%.
The central bank’s rate-setting monetary policy committee (MPC) voted to pause its cycle of rate cuts after three previous reductions in the past year. Ahead of the chancellor’s spring statement on Wednesday, the bank’s monetary policy committee (MPC) voted by eight to one to pause its cycle of rate cuts after three reductions in the past year.
Financial markets had widely expected the MPC to leave rates unchanged on Thursday, after Threadneedle Street in February lowered its key base rate from 4.75% and halved its UK growth forecast. Highlighting the risks from Donald Trump’s escalating trade wars and tax rises hitting the confidence of businesses and consumers, the committee said holding borrowing costs unchanged was warranted, even as the economy struggled for growth.
It comes less than a week before the chancellor, Rachel Reeves, will deliver her spring statement to the Commons on Wednesday, at a time when the UK economy is struggling for growth momentum after output unexpectedly fell in January and came close to stalling in the second half of last year. It also comes amid heightened concerns over Donald Trump’s trade wars hitting the world economy. Andrew Bailey, the Bank’s governor, said: “There’s a lot of economic uncertainty at the moment. We still think that interest rates are on a gradually declining path, but we’ve held them at 4.5% today.
UK inflation remains above the Bank’s 2% target and is expected to climb further within months as household energy costs increase and businesses react to measures in Reeves’s October budget that come into force in April. “We’ll be looking very closely at how the global and domestic economies are evolving at our six-weekly rate-setting meetings. Whatever happens, it’s our job to make sure that inflation stays low and stable.”
Industry groups have said the chancellor’s planned £25bn increase in employers’ national insurance contributions, and a 6.7% rise in the minimum wage from April, could feed through to higher prices. Financial markets had indicated a 90% probability that Threadneedle Street would not repeat February’s cut, when it lowered its key base rate from 4.75% and halved its UK growth forecast.
Inflation has fallen from a peak of more than 11% in the second half of 2022 after Russia’s invasion of Ukraine triggered a spike in energy costs. But the headline rate has begun rising again in recent months, increasing from 2.5% in December to 3% in January. Reeves will deliver her statement to the Commons next week against a backdrop of lacklustre domestic growth, stubbornly high inflation and rising global uncertainty as Trump imposes tariffs on the US’s allies and enemies alike. UK GDP unexpectedly fell in January, after having come close stalling in the second half of last year.
Threadneedle Street has signalled that borrowing costs are likely to be reduced in the coming months. However, economists have said rates may need to be held higher for longer to squeeze persistent inflationary pressures despite a slowdown in economic activity in the second half of last year. The Bank upgraded its forecast for growth in the first quarter from 0.1% to about 0.25% after a stronger end to 2024 than feared, but said the outlook remained highly uncertain amid weak consumer and business sentiment.
Industry groups have criticised the chancellor’s planned £25bn increase in employers’ national insurance contributions, and a 6.7% rise in the minimum wage from April, arguing that it is likely to stoke inflation.
In a blow for the chancellor ahead of the spring statement, the Bank published findings compiled by its network of agents across the country showing that growing numbers of companies were putting their hiring plans on ice.
“Employment intentions are now negative, on balance, with more firms reporting hiring pauses or freezes and saying they will review staffing levels through natural attrition or redundancies if the outlook does not improve,” the report said.
Highlighting “a material increase in total labour costs owing to the changes in employer NICs” alongside the increase in the “national living wage”, it said the rise in labour costs could be up to 10%.
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More details soon … Official figures show the jobs market has proven more resilient than business surveys, with the latest data on Thursday showing unemployment remained the same in January at 4.4% while pay growth stuck at historically high levels.
The Office for National Statistics has, however, cautioned against the reliability of its official figures because of difficulty compiling its survey since the pandemic.
While the majority of the nine-strong MPC voted to keep rates unchanged, preferring to monitor developments before taking action, one member, the external economist Swati Dhingra, was outvoted in pushing for an immediate quarter-point reduction.
Inflation has fallen from a peak of more than 11% in the second half of 2022 after Russia’s invasion of Ukraine triggered a spike in energy prices. But the headline rate remains above the Bank’s 2% target and has increased in recent months, from 2.5% in December to 3% in January. It is expected to climb further in coming months after an increase in household energy costs.
Threadneedle Street has signalled that borrowing costs are likely to be reduced further. However, economists have said rates may need to be held higher for longer to squeeze persistent inflationary pressures despite a slowdown in economic activity in the second half of last year.