The Bank of England has kept interest rates on hold as it warned UK growth is on the brink of stagnation amid the fallout from Rachel Reeves’s budget and threat of Donald Trump reigniting global trade wars.
Reflecting heightened concerns over stubborn inflation, the central bank’s rate-setting monetary policy committee (MPC) voted by a majority of six to three to leave interest rates unchanged at 4.75%, prolonging the pressure on households and businesses from elevated borrowing costs.
Threadneedle Street also issued a sharp downgrade in its forecasts for the British economy, predicting zero growth in the final three months of the year. It had said it expected 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 election victory, the MPC said growth was faltering while inflation risks remained.
“These developments have generated additional uncertainties around the economic outlook,” it added.
Some economists suggested the six-three split was a sign the Bank was preparing to lower borrowing costs at its next policy meeting in February, after Dave Ramsden, a deputy governor, joined the external MPC members Swati Dhingra and Alan Taylor in pushing for an immediate 0.25 point reduction.
However, the majority of the committee said there were dangers of inflation becoming entrenched after figures this week showed the headline rate reached 2.6% in November while annual pay growth accelerated. The group said this had “added to the risk of inflation persistence” despite a faltering growth outlook.
Rob Wood, the chief UK economist at the consultancy Pantheon Macroeconomics, said: “We think the details of the minutes are cautious and therefore more hawkish than that six-three headline would suggest. A February rate cut still looks more likely than not to us. But it is far from a slam dunk.”
Financial markets were betting on a 45% probability of a quarter-point rate cut at the next MPC meeting after Thursday’s announcement.
Signs of lingering inflationary pressure have rattled policymakers in the US and UK in recent weeks, although a worsening growth outlook and mounting political turmoil in the eurozone have paved the way for more decisive action from the European Central Bank next year.
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.
Andrew Bailey, the Bank’s governor, signalled that Threadneedle Street remained ready to cut interest rates in future but sounded a note of caution. “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.
Activity in Britain’s economy has weakened in recent months, with output shrinking unexpectedly by 0.1% in October as company bosses blamed the chancellor’s budget for sapping consumer confidence and hitting hiring demand.
Reeves announced a £25bn increase in employer national insurance contributions (NICs) from April to help fund battered public services and fill what she called a “black hole” in the public finances left by the Conservatives.
Business leaders have warned the tax rise could force them to cut jobs or pass on the costs to consumers by raising their prices. A closely watched business survey this week showed employment levels falling at the fastest pace in four years.
Reeves said the government was taking steps to support households. “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,” she said.
The Bank has said it is closely monitoring how companies respond to the increase.
Modupe Adegbembo, an economist at the US investment bank Jefferies, said City investors were questioning whether the Bank would be forced to hold interest rates at elevated levels to combat “stagflation” – low growth and high inflation.
“We are not convinced, we expect growth momentum to remain weak and prices to drift higher over the coming month, but think that the bar to the [Bank] pausing rate cuts is high,” she said.
