BoE keeps rates on hold at 4.5%

The Bank of England (BoE) has kept its interest rate unchanged at 4.5%, maintaining a “cautious” approach with intensified fears of global trade uncertainty. The central bank paused the rate cuts but left the possibility of future reductions open, waiting to see how persistent price pressures will be in the UK for the coming months.

According to the BBC, the BoE’s Monetary Policy Committee (MPC) voted 8-1 in favor of maintaining the current rate. Only Swati Dhingra was pushing for a quarter-point reduction. 

“We still think that interest rates are on a gradually declining path,” said BoE Governor Andrew Bailey, insinuating that there will be more cuts this year.

Inflation concerns weigh on BoE

The decision to maintain current interest rates follows a quarter-point rate cut in February, during which the central bank also downgraded its 2025 growth market growth forecast from 1.0% to 0.75%. 

In its minutes, the MPC reiterated its February guidance that more rate adjustments would be “gradual and careful,” asserting that monetary policy was not on a pre-set path. The meeting notes discussed a possible cut in May, but the move was not confirmed.

For the policymakers, inflation is the most pertinent issue, with the BoE raising its peak inflation prediction in 2025 to 3.75% in the third quarter, slightly higher than its previous estimate of 3.7%. UK inflation stood at 3% in January, well above the central bank’s 2% target.

The central bank also revised its economic growth projection for the first quarter of 2025, increasing it to 0.25% from a previous estimate of 0.1%. 

A survey from the BoE’s network of agents released on Thursday showed that more businesses were halting hiring operations, and some are preparing for potential job cuts if growth in the UK fails to accelerate.

“The Bank of England is stuck between a rock and a hard place with inflationary pressures mounting alongside a weak growth outlook,” said JPMorgan market analyst Zara Nokes.

Monetary policy affected by global trade uncertainties

The BoE’s decision comes just a day after the US Federal Reserve also opted to maintain rates while dropping its growth forecast from 2.1% to 1.7%, and raising its inflation projections to 2.7%, a 0.2% increment from its December predictions. 

“We’re not going to be in any hurry to move,” Powell told reporters on Wednesday. “Our current policy stance is well-positioned to deal with the risks and uncertainties we face. The right thing to do is to wait here for clarity about what the economy is doing.“

The UK believes trade policy disputes have escalated because of the US tariff measures and retaliatory actions from other countries in Europe and Asia.

Domestically, the UK government’s policies have also influenced the BoE’s cautious stance. The MPC coined an upcoming tax hike on employers as a contributing factor to price increases in the services sector. 

After the MPC’s voting, traders in the swaps market slightly lowered their expectations for a rate cut in May, with the probability dropping from 60% earlier in the day to just below 50%. Markets still anticipate two rate cuts by the end of the year.

The yield on two-year UK government bonds, which is sensitive to interest rate expectations, inched up to 4.1% from a low of 3.8% earlier in the day. The British pound also showed a muted reaction, rising to $1.29 and trimming its earlier decline to 0.4%.

Future interest rate expectations

Chancellor Rachel Reeves’ upcoming budget update next Wednesday will be another event on the central bank’s radar. Reeves is expected to announce cuts to public spending, which could have significant implications for the UK’s economic trajectory.

Shadow Chancellor of the Exchequer Mel Stride bashed the BoE for holding interest rates, cautioning that it would result in “higher mortgage costs for millions of households.” 

He holds Chancellor Rachel Reeves’ previous budget liable for pushing inflation up the federal bank’s target, arguing that it had made it more difficult to lower rates.  

Stride called on the chancellor to “manage public spending, borrowing, and debt.,” propounding that responsible fiscal policies will create conditions for the BoE to reduce borrowing rates in the future.

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