The Bank of England has kept interest rates on hold as it warned of growing economic uncertainty linked to Donald Trump’s trade war. 

The central bank’s monetary policy committee, which meets every six weeks to set borrowing costs, voted 8-1 to keep the bank rate unchanged at 4.5%.

Although the decision was widely expected, the vote was more unified than many assumed.

Just one member of the committee, Swati Dhingra, voted to cut rates by 25 basis points. In what may come as a surprise to some, Catherine Mann, who voted for an outsized 50 basis points cut last month, opted to hold.

The Bank kept its guidance unchanged, pointing to “a gradual and careful approach” to rate cuts, but warned it was prepared to keep borrowing rates higher for longer if wage and price growth continues to persist.

Concerns about constrained supply in the economy – which limits the economy’s ability to grow without sparking inflation – have been playing on policymakers’ minds.

The Bank echoed these concerns again today, alongside warnings about “second-round effects” from higher wages and prices, which could cause inflation to spiral. “This would warrant a relatively tighter monetary path,” it said.

Trade war concerns

Central bankers said they were also contending with an increasingly uncertain global outlook.

In minutes of the meeting published alongside the announcement, the Bank said: “Since the MPC’s previous meeting, global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded.

“Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally.”

The Bank was relatively sanguine about the impact of Trump’s tariff policy on the economic growth in the UK but said it could not be certain about the consequences for inflation.

Last night the US Federal Reserve kept its key borrowing rate on hold while downgrading growth forecasts and upgrading its inflation projections.

Central bankers in the UK are also contending with heightened policy uncertainty – both at home and abroad – which means they have been cautious in their approach.

Bank governor Andrew Bailey said: “We have to be quite careful at this point in how we calibrate our response because we’re still seeing a very gradual fall in inflation. We need to accumulate the evidence.”

The Bank started cutting rates in August but, since then, it has reduced the bank rate just three times as policymakers evaluate a mixed economic picture.

Along with fears about supply constraints in the economy, inflation has climbed back above the Bank of England’s 2% target and wage growth continues to outstrip inflation.

Average weekly earnings, including bonuses, did cool from 6.1 % to 5.8% in the three months to January but the figure is still considerably higher than the inflation rate of 3%.

Central bankers keep a close eye on wage growth as they fear wage pressures fuel price pressures in the economy.

Inflationary pressures still exist in the economy but the Bank is balancing that against signs of an economic slowdown.

The economy contracted by 0.1 % at the beginning of the year and the labour market is cooling. Recruiters are warning of a sharper slowdown when the chancellor’s national insurance contribution increases kick in next month.

The Bank of England reiterated this today, warning that business surveys “generally continue to suggest weakness in growth and particularly employment intentions”.

Where to for inflation?

There are also reasons to be sanguine on inflation.

While the headline rate jumped to 3% in January, the increase was driven by one-off factors and base effects, including VAT on private schools and a jump in airfares because of a shift in the timing of the Christmas holidays.

Food inflation also rose but food prices can be volatile.

The Bank is more interested in services inflation, which gives a better indication of domestically generated pressures. This came in at 5%, which was below the Bank’s forecast.

While the headline rate is expected to hit 3.7% by the summer, policymakers have indicated that this is likely to be a bump in the road – driven by a temporary jump in energy prices and rising water and council tax bills from April.

While these will eventually drop out of the inflation rate calculation, that will offer little relief to consumers who will still have to contend with a sustained rise in the price level.

The Bank’s decision to hold rates did not come as a surprise but the vote was more unified than expected.

It suggests concerns about inflation are niggling away at policymakers, even though economic growth has gone into reverse.

The headwinds are coming from home and abroad. Donald Trump has injected a big dose of uncertainty into the global economy and policymakers are grappling with the possible fall out, both for growth and inflation.

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That was the backdrop to today’s decision. While financial markets were confident that the Bank would respond by holding rates, it was not a given. Policy uncertainty is also bad for the economy and we are struggling on the growth front.

The economy is stagnating and the jobs market is cooling, with a sharper slowdown coming down the road when Rachel Reeves’ national insurance contribution increases come into force next month.

The spring statement later this month is also likely to include big spending cuts and possible tax rises, which could depress economic activity. Usually, this would be a strong cue for policymakers to start cutting rates and, for months now, there has been a growing clamour urging them to move faster.

Yet, they were almost unanimous in deciding to pause. Why?

The picture is complicated because the inflationary tiger is still lurking and the fear is that a temporary jump in inflation could become embedded.

Ultimately, getting inflation down to 2% is the Bank’s core mission. CPI is above target at 3% and wage growth is even higher, pushing 6%. The Bank is also increasingly concerned about the capacity of the economy, chiefly its ability to soak up more growth without prices having to rise.

Then there’s Trump.

The UK is not in the US president’s direct firing line bar tariffs on some metals and the Bank was relatively calm about the economic impact of Trump’s tariff policy – for now. However, it was less certain about the impact on inflation. On the one hand, a global rise in manufacturing costs could spur inflation higher. On the other hand, imports could become cheaper if our currency devalues relative to others. It’s an uncertain picture.

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We have a relatively small, open economy, leaving us vulnerable to global fluctuations. That’s something Dave Ramsden, the bank’s deputy governor, flagged in a speech in South Africa a couple of weeks ago.

It means we are still grappling with the worst of all possible worlds: Creeping inflation and weak economic growth. That’s not an easy one to navigate for the Bank of England.

Wage growth has remained strong, the latest official figures show, as the Bank of England decided to hold interest rates.

Wages – excluding bonuses – grew 5.9% in the three months to January, the same amount as a month earlier, data from the Office for National Statistics (ONS) showed.

Meanwhile, growth in average weekly earnings, including bonuses, fell to a surprise 5.8%. Economists polled by the Reuters news agency anticipated a 5.9% rise.

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It means wage growth is still high and well above the rate of overall price rises. Inflation stood at 3% in January.

Both private and public sectors have seen rises, the ONS said, describing the growth as “strong”.

It came as the Bank of England held interest rates at 4.5% at its meeting today, in part because of the inflationary impact of wage growth.

Wage increases have surpassed the level of inflation since July 2023, something that could stop the interest rate setters at the Bank from cutting rates at future meetings.

Unsurprising unemployment

There was little change in the rate of unemployment which remained at 4.4%.

The labour market picture is “relatively unchanged”, the ONS’s director of economic statistics, Liz McKeown said.

The number of employees on payrolls is “broadly flat” with little growth seen over the last year, she added.

The ONS, however, has advised caution in interpreting changes in the monthly unemployment rate due to questions over the reliability of the figures.

The exact number of unemployed people is not known – partly because people don’t answer the phone when the ONS calls.

Some good news for government

In good news for the government, data also released today showed a fall in the number of people neither in nor looking for work.

Welfare reforms announced this week aim to bring down the number of people classed as “economically inactive“.

But the numbers have already gone down.

ONS figures showed the economic inactivity rate for people aged 16 to 64 years was around 21.5% in the three months to January, below the same time last year as well as the preceding three months.