Bank of England maintains interest rates amid global trade tensions

In a move reflecting caution amidst escalating global trade disputes, the Bank of England (BoE) has opted to keep its benchmark interest rate steady at 4.5%. This decision underscores the central bank's delicate balancing act between curbing inflation and supporting economic growth in uncertain times.

Steady rates in turbulent times

On March 20, 2025, the BoE's Monetary Policy Committee (MPC) voted 8-1 to maintain the current interest rate of 4.5%. The sole dissenting voice, external member Swati Dhingra, advocated for a 0.25 percentage point reduction to stimulate demand. This decision aligns with the U.S. Federal Reserve's recent choice to hold rates steady, highlighting a coordinated approach among central banks facing similar global uncertainties. ​

Inflation concerns and wage dynamics

Inflation remains a pressing concern for the BoE. After peaking at 11.1% in October 2022, inflation has cooled to 3% but still exceeds the bank's 2% target. Complicating matters, the Office for National Statistics reported a 5.9% rise in earnings from November 2024 to January 2025, potentially fueling further price increases. The BoE projects that inflation could reach 3.75% this year, influenced by robust wage growth and external factors like rising energy costs. ​

Economic growth and the trade war's impact

The UK's economic growth has been tepid, with a modest 0.25% expansion anticipated in the first quarter of 2025, an improvement from the previously forecasted 0.1%. However, the broader picture reveals stagnation, with a 0.1% contraction in January and minimal growth since March of the previous year. These challenges are exacerbated by global trade tensions, particularly the tariff policies enacted by U.S. President Donald Trump. The BoE has expressed concern over the potential dampening effect these tariffs could have on global growth and demand for UK exports. ​

Business sentiment and future outlook

Domestic factors also weigh heavily on the UK's economic landscape. The BoE's regional agents have reported that UK businesses are freezing hiring plans in response to increased employer national insurance contributions and a 6.7% rise in the minimum wage set for April. These developments contribute to a cautious business environment, with companies hesitant to expand amid fiscal pressures and global uncertainties. ​

Looking ahead, the BoE has signaled a gradual and careful approach to potential rate cuts, emphasizing the need for an accumulation of evidence indicating a downward trend in inflation before proceeding. Investors anticipate that the central bank may implement two or three more quarter-point reductions this year, with the next cut forecasted for May. This cautious stance reflects the BoE's commitment to balancing the dual objectives of controlling inflation and fostering economic growth in a complex and evolving global landscape.