BoE holds rates at 4.5% as trade war and labour costs weigh on growth

The Bank of England (BoE) has opted to keep interest rates steady at 4.5%, as policymakers balance stubborn inflation pressures, slowing growth, and mounting global uncertainty linked to the escalating US trade war.

In an 8-1 decision, the Monetary Policy Committee (MPC) voted to pause its cycle of rate cuts, despite earlier expectations that some policymakers might push for a reduction.

Only Swati Dhingra called for a 25-basis-point cut, while Catherine Mann, who previously voted for an outsized cut, unexpectedly backed holding rates.

Governor Andrew Bailey signalled that rate cuts remain on the table but will be gradual and carefully calibrated.

“We still think that interest rates are on a gradually declining path, but we’ve held them at 4.5% today,” Bailey said. “We’ll be looking very closely at how the global and domestic economies evolve.”

While markets had widely expected the BoE to hold rates, the decision comes at a time of weak domestic growth, persistent inflation, and heightened geopolitical risks.

Trade War Uncertainty and Global Risks Weigh on BoE Outlook

The BoE highlighted escalating global trade policy tensions—notably those stemming from US tariff policies—as a key factor contributing to heightened economic uncertainty.

“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,” the BoE noted in its meeting minutes.

While the central bank remains uncertain about the long-term impact of US tariffs on UK inflation, policymakers acknowledged the potential for knock-on effects on global supply chains and trade flows.

Domestic Pressures: Hiring Freezes and Labour Cost Concerns

The BoE’s decision also reflects concerns about labour market trends, as businesses respond to Rachel Reeves’ tax increases and broader economic uncertainty by freezing hiring plans.

According to the BoE’s latest agent survey, more firms are pausing recruitment or reviewing staffing levels, with many opting for natural attrition or redundancies rather than active hiring.

The key driver? Rising labour costs.

The introduction of the £25 billion increase in employers’ National Insurance Contributions (NICs), alongside a 6.7% increase in the National Living Wage, has pushed total labour costs up by as much as 10% in some sectors.

While headline unemployment remained stable at 4.4%, the BoE acknowledged that the labour market is softening, with business surveys indicating weaker employment intentions in the months ahead.

Inflation Concerns: Stubborn But Not Out of Control

Inflation remains above the BoE’s 2% target, having risen from 2.5% in December to 3% in January. However, much of the recent increase has been driven by temporary factors, such as:

• VAT changes on private schools
• Higher airfares due to seasonal timing shifts
• Volatility in food prices

The BoE is more focused on services inflation, which came in at 5%—lower than its previous forecast but still high enough to warrant caution.

While inflation is expected to peak at 3.75% by Q3 2025, Bailey emphasised that the BoE will remain attentive to any signs of lasting inflationary pressure.

When Will the Next Rate Cut Come?

Despite keeping rates unchanged, the BoE maintains a bias toward rate cuts, with markets expecting the next reduction in August. However, policymakers stressed that they are in no rush and will assess incoming data on wage growth, inflation trends, and economic activity before making any moves.

Paul Dales, Chief UK Economist at Capital Economics, suggested that while rate cuts will resume, they may be slower than markets anticipate.

“There appears to be diminishing appetite for cutting rates faster and a growing desire to cut at the current pace at best,” Dales said.

The BoE’s gradualist approach stands in contrast to the US Federal Reserve, which recently signalled that rate cuts in the US may be further delayed due to elevated inflation risks.

For businesses and financial markets, the message from the BoE remains clear: expect cuts—but not quickly.