In a highly anticipated decision, the Bank of England opted to keep interest rates unchanged at 4.75%, even as it warned that the UK economy teeters on the brink of stagnation. The central bank’s somber assessment highlighted the mounting challenges facing Britain, including stubbornly high inflation, fallout from the government’s deficit-reduction budget, and the looming specter of reignited trade wars in the wake of Donald Trump’s election victory in the United States.
Slashing Growth Forecasts
Underscoring the darkening economic outlook, the Bank of England’s Monetary Policy Committee (MPC) dramatically cut its growth forecast for the final quarter of the year to zero percent, down from the 0.3% expansion it had projected just last month. This stark downgrade reflects the confluence of domestic and international headwinds buffeting the British economy.
Budget Squeeze and Trade Jitters
The MPC specifically called out Chancellor Rachel Reeves’ £40 billion tax-raising budget as a drag on growth, noting that the fiscal tightening comes at a particularly vulnerable time for the economy. On the global front, Trump’s return to the White House has stoked fears of a resurgence in protectionist trade policies that could further sap economic momentum.
“These developments have generated additional uncertainties around the economic outlook,” the Bank of England warned in its statement.
Inflation Remains Thorny Issue
Despite the weakening growth picture, the majority of the nine-member MPC remained concerned about persistent inflationary pressures. With the headline inflation rate climbing to 2.6% in November, well above the Bank’s 2% target, policymakers are wary of price increases becoming entrenched at elevated levels.
However, the decision to hold rates steady was not unanimous, reflecting the difficult balancing act facing the central bank. Three members of the MPC, including Deputy Governor Dave Ramsden and external economists Swati Dhingra and Alan Taylor, dissented in favor of an immediate quarter-point rate reduction to support the faltering economy.
Signaling Caution on Rate Cuts
While leaving the door open to potential rate cuts down the road, Governor Andrew Bailey struck a cautious tone in his remarks. He emphasized that any easing would likely be gradual and contingent on how economic conditions evolve.
“We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year,” Bailey stated.
The Bank’s circumspect stance contrasts somewhat with the Federal Reserve, which trimmed rates by 25 basis points on Wednesday while hinting at a shallower trajectory for further cuts in 2025. The divergence reflects the unique circumstances and policy priorities in each economy.
Monitoring Corporate Response to Budget
Looking ahead, the Bank of England plans to keep a close eye on how companies react to the tax hikes and minimum wage increase in Reeves’ budget, wary that some firms might seek to offset higher costs by raising prices, thereby stoking inflation. On the other hand, if businesses respond by shedding workers, the resulting labor market slack could bolster the case for rate cuts.
- Key factors in BoE rate deliberations:
- Inflation trends and expectations
- Corporate response to budget measures
- Labor market developments
- Global trade and geopolitical risks
With the UK economy navigating treacherous cross-currents, the Bank of England faces an exceptionally challenging policy landscape as it seeks to tame inflation without tipping the country into a painful recession. As the central bank walks this tightrope, investors and analysts will be parsing every word and data point for clues on the likely path forward.
