Interest rates set to stay at 4.5% as Bank of England faces ‘fog of uncertainty’

The Bank of England is expected to keep interest rates on hold as policymakers face a “fog of uncertainty” over US President Donald Trump’s developing tariff policy and upcoming UK tax rises.

Experts widely think that the Bank’s Monetary Policy Committee (MPC) will hold rates at 4.5% on Thursday.

The MPC has been gradually cutting borrowing costs since August last year, easing pressure on some borrowers who have seen lower mortgage rates enter the market.

But the Bank’s governor and member of the committee Andrew Bailey has been keen to stress that they want to take a “gradual and careful approach” to reducing rates while monitoring changes in the UK and global economy.

Inflation

In particular, UK inflation has risen again in recent months, mainly thanks to energy prices, water bills and bus fares.

Sandra Horsfield, an analyst for Investec Economics, said the latest official data had been “bittersweet”, as the increase in the Consumer Prices Index (CPI) inflation rate to 3% in January “will not have been welcomed”.

“But the 0.2 percentage points downside surprise in the services inflation rate, the stickiness of which has presented the main concern for the MPC even as overall inflation has fallen, will have been met with some relief,” she said.

Policymakers will also be considering the inflation impact of possible spending cuts in the Government’s spring statement, which will be unveiled at the end of this month, as well as new US tariffs on UK steel and aluminium.

“There will also be evidence soon, rather than merely forecasts, of how firms are handling the rises in employer national insurance contributions and the minimum wage,” Ms Horsfield added.

“Murky as the picture looks now, some things will become a lot clearer soon,” she said, adding: “The fog of uncertainty is an unavoidable constant in economic forecasting.”

Threat

Andrew Goodwin, chief UK economist at Oxford Economics, said the “most obvious threat” to the path of interest rate cuts “will be evidence of the impact of April’s increases in regulated prices, employers’ national insurance contributions, and the national living wage”.

The Bank has previously said the extra costs for businesses could risk putting more people out of work, or add to inflation if retailers raise prices for customers.

Mr Goodwin is also expecting the MPC to keep interest rates at 4.5% on Thursday amid heightened uncertainty.

Furthermore, Robert Wood and Elliott Jordan-Doak, economists at Pantheon Macroeconomics, said the MPC will “have to consider US President Trump’s actions” which have been “driving an equity market sell-off and skyrocketing uncertainty” and therefore fuelling concerns over the outlook for global economic growth.

But they added that the MPC is “as unable as anyone else to predict Mr Trump’s next move”.

The committee last month insisted that it is not yet known how tariffs – which have been placed on China, Canada and Mexico – will impact the UK economy.

The Pantheon economists predict interest rates will be kept on hold this month – but that two more cuts will come in May and November this year.