Bank of England holds interest rate at 4.5% amid trade war uncertainty

Published

4 months ago

March 20, 2025

admin

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.

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.

Business

UK economy figures not as bad as they look despite GDP fall, analysts say

Published

19 hours ago

July 11, 2025

admin

UK economy figures not as bad as they look despite GDP fall, analysts say

The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.

A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).

Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.

It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.

A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.

This was borne out by other figures released by the ONS on Friday.

Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.

Overall, there was a “large rise in goods imports and a fall in goods exports”.

A ‘disappointing’ but mixed picture

It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.

“I am determined to kickstart economic growth and deliver on that promise”, she added.

But the picture was not all bad.

Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.

It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.

The expansion in March means the economy still grew when the three months are looked at together.

While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.

Such a cut would bring down the rate to 4% and make borrowing cheaper.

Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.

“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.

Why did the economy shrink?

The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.

The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.

It made up for a “very weak” month for retailers, the ONS said.

Business

UK economy remains fragile – and there are risks and traps lurking around the corner

Published

19 hours ago

July 11, 2025

admin

UK economy remains fragile - and there are risks and traps lurking around the corner

Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.

However, the picture emerging a year since the election of the Labour government is not hugely comforting.

This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.

Output shrank in May by 0.1%. That followed a 0.3% drop in April.

Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.

Hangover from artificial growth

However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.

In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.

Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.

Signs of recovery

Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.

“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.

Meanwhile, the services sector eked out growth of 0.1%.

A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.

Struggles ahead

It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.

The economy remains fragile, and there are risks and traps lurking around the corner.

Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.

Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.

Business

Government to announce new scheme as it ramps up AI adoption with backing from Facebook owner Meta

Published

1 day ago

July 11, 2025

admin

Government to announce new scheme as it ramps up AI adoption with backing from Facebook owner Meta

The government is speeding up its adoption of AI to try and encourage economic growth – with backing from Facebook parent Meta.

It will today announce a $1m (£740,000) scheme to hire up to 10 AI “experts” to help with the adoption of the technology.

Sir Keir Starmer has spoken repeatedly about wanting to use the developing technology as part of his “plan for change” to improve the UK – with claims it could produce tens of billions in savings and efficiencies.

Politics live: Follow the latest updates

The government is hoping the new hires could help with problems like translating classified documents en masse, speeding up planning applications or help with emergency responses when power or internet outages occur.

The funding for the roles is coming from Meta, through the Alan Turing Institute. Adverts will go live next week, with the new fellowships expected to start at the beginning of 2026.

Technology Secretary Peter Kyle said: “This fellowship is the best of AI in action – open, practical, and built for public good. It’s about delivery, not just ideas – creating real tools that help government work better for people.”

He added: “The fellowship will help scale that kind of impact across government, and develop sovereign capabilities where the UK must lead, like national security and critical infrastructure.”

The projects will all be based on open source models, meaning there will be a minimal cost for the government when it comes to licensing.

Meta describes its own AI model, Llama, as open source, although there are questions around whether it truly qualifies for that title due to parts of its code base not being published.

The owner of Facebook has also sponsored several studies into the benefits of government adopting more open source AI tools.

Mr Kyle’s Department for Science and Technology has been working on its mission to increase the uptake of AI within government, including through the artificial intelligence “incubator”, under which these fellowships will fall.

The secretary of state has pointed to the success of Caddy – a tool that helps call centre workers search for answers in official documents faster – and its expanding use across government as an example of an AI success story.

He said the tool, developed with Citizens Advice, shows how AI can “boost productivity, improve decision-making, and support frontline staff”. A trial suggested it could cut waiting times for calls in half.

My Kyle also recently announced a deal with Google to provide tech support to government and assist with modernisation of data.

👉Listen to Politics at Sam and Anne’s on your podcast app👈       

Joel Kaplan, the chief global affairs officer from Meta, said: “Open-source AI models are helping researchers and developers make major scientific and medical breakthroughs, and they have the potential to transform the delivery of public services too.

“This partnership with ATI will help the government access some of the brightest minds and the technology they need to solve big challenges – and to do it openly and in the public interest.”

Jean Innes, the head of the Alan Turing Institute, said: “These fellowships will offer an innovative way to match AI experts with the real world challenges our public services are facing.”