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.
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.
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.
“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.
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”.
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.
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.
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. 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 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.
“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.”
