UK economic growth will be hit by US tariffs, which are the biggest trade policy change in a century, a senior Bank of England official has warned.
Sarah Breeden, the Bank’s deputy governor for financial stability, said on Thursday that business activity was likely to be adversely affected by Donald Trump’s tariff regime, dragging down the UK’s already weak growth rate.
However, it was “too early to call” the impact tariffs would have on inflation, she said.
Warning that there could be further turmoil on financial markets, Breeden said the central bank was monitoring the situation carefully to judge the impact on City firms and the wider economy.
Breeden, who sits on the Bank’s interest rate setting committee, said she was on the lookout for panic selling that could undermine confidence in the City and jeopardise financial stability.
She said the bounce-back in markets on Wednesday had eased those concerns, but “underlying vulnerabilities remained”.
Financial markets could fall further during a period of uncertainty, she added, forcing City firms to unwind holdings quickly and at a loss, heaping pressure on City deal-making.
Her comments follow a report by the Bank’s financial policy committee earlier in the week, which said its global risk environment had deteriorated and “uncertainty had intensified” since its last update in November, with US tariff announcements contributing to a “material increase in risks to global growth” and inflation levels.
In a sobering speech in London, Breeden said it was clear that tariffs would send growth downwards, but it was unclear how they would affect inflation.
“Given all of the uncertainties, I think it’s too early to call the overall impact on inflation for the UK, and hence the appropriate monetary policy response at this stage,” she said.
Breeden said the new wave of levies marked “the most significant change in trade policy in a century”.
She said uncertainty over trade policy and broader geopolitics could bring “a chilling effect on business and consumer behaviour, weakening activity and inflationary pressure.
“So I would expect tariffs to lower economic activity as barriers to trade inherently weigh on global demand,” she added.
“This, too, is uncertain and will depend heavily on the decisions of other countries to impose counter-tariffs, the evolution of the global risk sentiment and developments in financial markets more broadly,” she said.
The pound had remained steady, but it was possible that it could weaken as the global economy slowed, increasing the price of imports and pushing up inflation. “So far, sterling has not weakened, but it could change,” Breeden said.
