The Bank of England Holds Interest Rates at 4.5%, Warns Economic Uncertainty

Mr Bailey stated that it was the Bank of England’s responsibility to maintain the inflation rate low and stable.

The Bank of England has warned that economic and global uncertainty has intensified as it maintains the interest rates at 4.5% in response to Rachel Reeves‘ tax hikes.

The bank said US trade tariffs have created uncertainty for the countries. This decision was expected widely, but Governor Andrew Bailey defends it by saying the rates are going down the slope.

Analysts expect two more rate cuts, with many predicting the next one in May.

The bank’s monetary policy committee (MPC) voted eight to ten to stop the rate-cutting cycle before the chancellor’s spring statement on Wednesday.

The bank committee justified the decision to keep borrowing costs the same despite the challenges of the economy, pointing out the risks from Donald Trump’s trade wars and tax rises hitting the confidence of consumers and businesses.

Mr Bailey stated that the bank needs to maintain the inflation rate low and stable. Inflation, the rate at which prices increase, is at 3%, more than the bank’s 2% target.

Bailey added they are observing how the domestic and global economies are evolving and ensuring that inflation is stable regardless of what happens.

The basic interest rate determines the rates for the High Street banks and lenders. Now, people pay more to borrow money for credit cards and mortgages due to the comparatively higher-level rates in recent years, but savers have also benefited from higher returns.

The latest rate decision did not immediately affect the monthly installments for the 600,000 homeowners’ mortgages that follow the bank’s rate.

Financial markets predicted that there was a 90% chance that Threadneedle Street, a location of the Bank of England and a former site for the London Stock Exchange, would not repeat its February cut when it slashed its key base rate from 4.75% and decreased its UK growth projection.

More than eight out of 10 customers have fixed-rate agreements, which means that when those deals expire, they have a higher repayment cost.

Recently, mortgage rates have been slowly edging down. The average rate for a two-year fixed mortgage was 5.33%, while the average rate for a five-year was 5.18%.

The bank has raised its first-quarter growth prediction from 0.1% to around 0.25% after a better-than-expected end to 2024 but stated that the future is quite uncertain due to weak business and consumer sentiment.

Industry groups have criticized the chancellor’s proposed £25 billion increase in employers’ national insurance contributions (NIC) and a 6.7% hike in the minimum wage to have been the fuel for inflation.

Many companies have put their hiring plans on freeze. The bank published findings that there could be a 10% increase in labor costs due to changes in employer NIC and an increase in national living wage.

Figures show that wage growth has stalled at historically high levels, and unemployment stayed at 4.4%.

Inflation decreased after Russia invaded Ukraine and increased energy prices. However, the headline rate has risen from 2.5% to 3% and is higher than the bank’s 2% target. It will rise even higher after an increase in household energy costs.

Trade tariffs imposed by the US also threatened to raise the prices for UK businesses. Most banks are in “wait and see” mode as they also face the pressure of paying more NICs next month.

The idea behind raising the interest rates to fight inflation was that when the borrowing costs become costly, more people will have to reduce their spending, which will bring down the demand for goods and price rises.

It is also a delicate balance since high interest rates harm the economy as businesses hold off their investment for production and jobs.

The government previously cut its economic growth forecast for a year in a setback to the government, whose top goal was to expand the economy.