The Bank of England (BoE) has decided to keep interest rates unchanged on Thursday as the U.K. economy grapples with uncertainty surrounding global trade and the potential for stagnation domestically. This widely anticipated choice maintains the central bank’s benchmark interest rate at 4.5 percent. After the announcement, the British pound fell by 0.3 percent against the dollar by 12:28 p.m. in London. Additionally, yields on British government bonds—known as gilts—declined slightly, with the yield on 10-year gilts last recorded over four basis points lower.
Central bank’s decision backed by majority vote
In a statement, the central bank indicated that its Monetary Policy Committee voted to maintain rates unchanged with an 8-1 majority. One member of the MPC advocated for a reduction of 25 basis points. “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 statement read. “Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally.”
Economic headwinds at home and abroad
This decision arrives amid potential economic challenges both internationally and domestically. Globally, this encompasses the frequent shifts, ambiguity, and conflict surrounding U.S. President Donald Trump’s trade tariffs, along with their possible ramifications on U.K. inflation and economic growth. The U.K. economy has exhibited signs of weakening, contracting by 0.1 percent month-on-month in January. The BOE in February reduced its growth forecast for 2025 to 0.75 percent.
Read more: Bank of England cuts interest rates to 4.5 percent, lowest since 18 months
Indicators suggest weakness in growth and employment
On Thursday, the central bank noted that recent business indicators pointed to a decline in economic growth and employment intentions. In February, it had also indicated an expectation that inflation would temporarily rise to 3.7 percent in the third quarter of this year, as energy costs are anticipated to surge. U.K. inflation had already spiked sharply to a higher-than-expected 3 percent in January.
Gradual approach to monetary policy withdrawal
Looking ahead, the central bank asserted that, based on its medium-term inflation expectations, “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.” However, the BOE indicated that this would be contingent on how the economy evolves moving forward. “Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of Bank Rate,” it elaborated. “Should there be more constrained supply relative to demand and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation, this would warrant a relatively tighter monetary policy path.”
Upcoming taxation changes and fiscal pressures
Thursday’s meeting precedes imminent U.K. government taxation changes that have proven to be unpopular with businesses, which claim their increasing tax burden could adversely affect growth, investment, and jobs. The U.K. Treasury’s “Spring Statement,” during which British Chancellor Rachel Reeves will provide an update on her plans for the British economy, is also approaching on March 26. The finance minister is under pressure to either reduce public spending, increase taxes further, or adjust the government’s self-imposed fiscal rules amid rising borrowing costs.
