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Bank of England holds interest rate at 4.75% but warns of UK stagnation risk Bank of England holds interest rate at 4.75% but warns of UK stagnation risk
(about 4 hours later)
Central bank downgrades growth forecast amid threat from budget fallout, rising inflation and Trump trade tariffsCentral bank downgrades growth forecast amid threat from budget fallout, rising inflation and Trump trade tariffs
Business live – latest updates The Bank of England has kept interest rates on hold as it warned UK growth is on the brink of stagnation amid the fallout from Rachel Reeves’s budget and threat of Donald Trump reigniting global trade wars.
The Bank of England has kept UK interest rates unchanged but warned Britain’s economy is on the brink of stagnation after Rachel Reeves’s budget as the world faces stubbornly high inflation and the risk of Donald Trump reigniting trade wars. Reflecting heightened concerns over stubborn inflation, the central bank’s rate-setting monetary policy committee (MPC) voted by a majority of six to three to leave interest rates unchanged at 4.75%, prolonging the pressure on households and businesses from elevated borrowing costs.
Holding interest rates at 4.75% in a widely expected decision, the central bank’s monetary policy committee (MPC) said on Thursday it had slashed its UK forecasts for the final three months of the year with a prediction of zero economic growth. The Bank had predicted growth of 0.3% as recently as November. Threadneedle Street also issued a sharp downgrade in its forecasts for the British economy, predicting zero growth in the final three months of the year. It had said it expected growth of 0.3% as recently as November.
Highlighting the chancellor’s £40bn tax-raising budget, alongside rising geopolitical tensions and trade policy uncertainty after Trump’s November election victory, the MPC said growth was faltering while inflation risks remained. Highlighting the chancellor’s £40bn tax-raising budget, alongside rising geopolitical tensions and trade policy uncertainty after Trump’s election victory, the MPC said growth was faltering while inflation risks remained.
“These developments have generated additional uncertainties around the economic outlook,” it added.“These developments have generated additional uncertainties around the economic outlook,” it added.
The MPC voted by a majority of six to three to keep interest rates unchanged. Three members of the nine-strong panel – the deputy governor, Dave Ramsden, and the external economists Swati Dhingra and Alan Taylor – preferred a 0.25 point reduction in borrowing costs amid concerns over the worsening growth outlook. Some economists suggested the six-three split was a sign the Bank was preparing to lower borrowing costs at its next policy meeting in February, after Dave Ramsden, a deputy governor, joined the external MPC members Swati Dhingra and Alan Taylor in pushing for an immediate 0.25 point reduction.
However, the majority of the committee said there were dangers of inflation becoming entrenched at elevated levels after figures this week showed the headline rate rose further above the Bank’s 2% target to hit 2.6% in November, while wage growth rose by more than expected. The group said this had “added to the risk of inflation persistence”. However, the majority of the committee said there were dangers of inflation becoming entrenched after figures this week showed the headline rate reached 2.6% in November while annual pay growth accelerated. The group said this had “added to the risk of inflation persistence” despite a faltering growth outlook.
Andrew Bailey, the Bank’s governor, signalled that Threadneedle Street remained ready to cut interest rates in future but sounded a note of caution over the economic outlook. “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,” he said. Rob Wood, the chief UK economist at the consultancy Pantheon Macroeconomics, said: “We think the details of the minutes are cautious and therefore more hawkish than that six-three headline would suggest. A February rate cut still looks more likely than not to us. But it is far from a slam dunk.”
Financial markets were betting on a 45% probability of a quarter-point rate cut at the next MPC meeting after Thursday’s announcement.
Signs of lingering inflationary pressure have rattled policymakers in the US and UK in recent weeks, although a worsening growth outlook and mounting political turmoil in the eurozone have paved the way for more decisive action from the European Central Bank next year.
The US Federal Reserve cut interest rates on Wednesday by a quarter of a percentage point to a range of between 4.25% and 4.5% but suggested it would make fewer rate cuts than expected in 2025, sparking a sell-off in financial markets.The US Federal Reserve cut interest rates on Wednesday by a quarter of a percentage point to a range of between 4.25% and 4.5% but suggested it would make fewer rate cuts than expected in 2025, sparking a sell-off in financial markets.
The Bank of England has signalled that UK borrowing costs are likely to be reduced further. While some economists said the six-three split on the MPC made a rate cut at its next policy meeting in February more likely. However, the Bank has said it is monitoring how companies respond to Reeves’s budget amid warnings that tax increases and the rise in the minimum wage could stoke inflation further. Andrew Bailey, the Bank’s governor, signalled that Threadneedle Street remained ready to cut interest rates in future but sounded a note of caution. “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,” he said.
Responding, Ian Stewart, the chief UK economist at the accountancy firm Deloitte, said: “Sluggish growth and a softening in the labour market are likely to restart the easing cycle in the new year, with February being the most likely timing for the next rate cut. By the end of 2025, we expect to see UK interest rates at around the 4.0% mark.” Activity in Britain’s economy has weakened in recent months, with output shrinking unexpectedly by 0.1% in October as company bosses blamed the chancellor’s budget for sapping consumer confidence and hitting hiring demand.
Activity in Britain’s economy has weakened in recent months, with output shrinking unexpectedly by 0.1% in October. Companies shedding jobs could add to slack in the labour market, where data this week indicated businesses were cutting staff at fastest rate since 2021, fuelling calls for a return to a rate-cutting cycle. Reeves announced a £25bn increase in employer national insurance contributions (NICs) from April to help fund battered public services and fill what she called a “black hole” in the public finances left by the Conservatives.
Reeves said: “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that. Business leaders have warned the tax rise could force them to cut jobs or pass on the costs to consumers by raising their prices. A closely watched business survey this week showed employment levels falling at the fastest pace in four years.
“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the national living wage for 3 million people.” Reeves said the government was taking steps to support households. “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that,” she said.
The Bank has said it is closely monitoring how companies respond to the increase.
Modupe Adegbembo, an economist at the US investment bank Jefferies, said City investors were questioning whether the Bank would be forced to hold interest rates at elevated levels to combat “stagflation” – low growth and high inflation.
“We are not convinced, we expect growth momentum to remain weak and prices drift higher over the coming month, but think that the bar to the [Bank] pausing rate cuts is high,” she said.