The Bank of England on Thursday, March 20, decided to keep interest rates at the same level, as the United Kingdom is currently facing uncertainty in the context of the prospects for the further dynamic of the global trade situation and is approaching a recession scenario in the country’s economic system.
The mentioned financial regulator keeps the benchmark interest rate at 4.5%. In an official statement from the central bank of the United Kingdom, it was noted that its Monetary Policy Committee voted in favor of leaving the cost of borrowing unchanged with an 8-1 majority. One member of this committee voted in favor of cutting interest rates by 25 basis points.
The average two-year fixed mortgage rate was 5.33%, while the average five-year fix was 5.18%.
Also, in an official statement by the central bank of the United Kingdom, it was noted that since the previous meeting on monetary policy, uncertainty about the future state of affairs in the global trade area has increased. In this context, the main impact factor is the gradual intensification of what can be called the tariff confrontation between the countries. The United States has decided on levies on imported goods. Several countries that have been affected by the mentioned measures to tighten Washington’s trade policy have announced retaliatory actions or corresponding intentions. Against this background, a situation of confrontation has formed in the global trade space. It is not yet known whether the world’s capitals will be able to reach an agreement on the normalization of the situation or whether the plight will move along an escalation trajectory.
The Bank of England’s official statement also noted that other factors of geopolitical uncertainty have increased since the last monetary policy meeting. Moreover, in the relevant context, it was overlined that financial market volatility indicators have risen around the world.
Paul Dales, UK chief economist at Capital Economics, said in a note that the central bank of the United Kingdom was always going to continue its cut-hold-cut-hold pattern by leaving interest rates at 4.5% but, in contrast to what happened at the last meeting in February, the vote was more hawkish than expected.
The Bank of England last left borrowing costs unchanged in December. At that time, three members of the Monetary Policy Committee voted for a consistent cutting of interest rates. In March, only one official of the central bank of the United Kingdom demonstrated a corresponding position.
Currently, the Bank of England is making monetary policy decisions in the face of possible economic difficulties both in the United Kingdom and abroad. At the global level, there is an above-mentioned lack of clarity and conflicts related to the tariffs of the administration of the President of the United States, Donald Trump. It is currently unknown what impact Washington’s trade policy tightening measures will have on inflation and economic growth in the United Kingdom.
It is worth noting that the UK economy has been showing signs of weakening recently. In January, the gross domestic product (GDP) of the United Kingdom decreased by 0.1% on a monthly basis. In February, the Bank of England halved the UK economic growth forecast for 2025 to 0.75%.
On Thursday, the United Kingdom’s financial regulator said the latest business activity data showed weakness in the upward dynamic of UK GDP and employment intentions.
In February, the Bank of England announced the expectation that in the third quarter of the current year, the United Kingdom will record a temporary increase in inflation to 3.7%. Separately, it was noted that this forecast is related to the fact that energy prices are set to accelerate.
In January, inflation in the United Kingdom rose sharply to 3%. The mentioned increase in this indicator exceeded preliminary expectations. It is worth noting that the target of the central bank of the United Kingdom for inflation is 2%.
Hussain Mehdi, investment strategy director at HSBC Asset Management, said in a note that the March monetary policy meeting was challenging for the UK financial regulator due to the murky outlook. The expert also stated that the stagflationary tone of the latest economic data means that the Monetary Policy Committee is balancing inflation considerations against downside growth risks and fragile confidence. According to Hussain Mehdi, it currently seems the inflationary side of the debate is dominant, reflected in just one of the mentioned committee members voting to cut. Moreover, the expert said that looking ahead, the Monetary Policy Committee’s sensitivity to the growth data could increase as elevated global policy uncertainty and weak confidence may present a risk of a sharper-than-expected downturn, with limited fiscal room for maneuver.
The central bank of the United Kingdom noted that based on its medium-term inflation expectations, a gradual and careful approach to further easing monetary policy measures is advisable. However, the UK financial regulator has stated that it will depend on how the economy develops going forward. The central bank of the United Kingdom also noted that greater or longer-lasting weakness in demand relative to supply, this could push down inflationary pressures, guaranteeing a less restrictive path of rate.
Moreover, the UK financial regulator has stated that if supply is more constrained relative to demand and more persistent in domestic wages and prices, including due to second-round effects related to higher consumer price inflation, this would warrant a tighter monetary policy.
Paul Dales said that although some dovish changes were made to the wording of the Bank of England’s official statement, they were outweighed by new, more hawkish tones.
After it became known about the decision of the financial regulator of the United Kingdom, the pound sterling decreased by 0.3% against the dollar. At the same time, UK government bond yields, known as gilts, have shown a decline. The yield on 10-year gilts dropped by more than four basis points.
It is worth noting that the tax changes of the government of the United Kingdom will come into force in a few days. The relevant changes were extremely negatively perceived by representatives of the business environment. Opponents of the mentioned decision claim that the increasing tax burden can become a factor of negative impact on economic growth, investments, and jobs.
Next week, the UK Treasury’s Spring Statement, during which British Chancellor Rachel Reeves will present an update on her plans for the United Kingdom economy. The finance minister is currently under pressure to cut public spending, raise taxes further, or bend the government’s self-imposed fiscal rules amid higher interest rates.
The media, citing the opinion of the experts interviewed, reported that the Bank of England may decide to lower the cost of borrowing in May. The mentioned experts expect that by the end of the current year, the financial regulator of the United Kingdom will cut interest rates two times.
As we have reported earlier, Fed Holds Interest Rates Steady.
