Inflation fears keep interest rate frozen at 4.5%

An overwhelming majority of Bank of England members voted to keep interest rates at 4.5%, as fears about inflation stalked the corridors of Threadneedle Street

Only one member of the nine-strong monetary policy committee voted for a rate cut, a marked change from last month’s review when they all went for a 0.25% cut, with two even arguing for a bumper 0.5% rate reduction.

This time, only one member voted for a 0.25% cut, delivering any other blow to consumers and businesses battered by the difficult economic situation with fears about upcoming tax hikes for employers from April, and a raft of consumer price hikes to water, mobile phone contracts, broadband and council tax, also coming in next month.

This will undoubtedly push up inflation from the current 3% recorded in January, and the February figure is due to be published on the same day as the chancellor Rachel Reeves presents her first Spring Statement, which is expected to signal a new period of austerity.

Following the meeting, the Bank of England warned: ‘Since the 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.

‘Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally. The German government has announced plans for significant reform to its fiscal rules.’

There are also major concerns about the poor UK growth figures, with last the GDP take indicating a 0.1% contraction in the economy in January. This was a blow after 0.4% growth in December.

The Bank noted: ‘Business survey indicators generally continue to suggest weakness in growth and particularly in employment intentions. In recent quarters, subdued activity has been judged to reflect both demand and supply factors.’

Inflation fears continue to concern policy makers, with the Bank projecting 3.75% CPI in Q3, so as early as July.

Longer term, the Bank noted: ‘While inflation is expected to fall back thereafter, the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.

‘Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.’

The decision was expected with inflation pressures building and concerns about the fallout from US trade wars as president Trump’s latest tariffs are due to kick in from 2 April.

Professor Joe Nellis, economic adviser at MHA, added: ‘The Monetary Policy Committee has been left with no choice but to halt a recent drive to cut interest rates. A combination of domestic and international factors has meant that the rate-cutting zeal of their last meeting has been replaced by caution.

‘Internationally, economic uncertainty has increased as a result of Trump’s tariff policies, with a surge in trade protectionism likely to spark a trade war that pushes up consumer price inflation across the globe.

‘Domestically, inflation in the UK is set to rise in the coming months, despite predictions otherwise at the turn of the year. The Bank of England now predicts that inflation could climb as high as 3.7% later this year. Strong average earnings growth and a number of planned regulated price increases could see inflation rise even higher.

‘The Bank finds itself in a tough spot — while the resurgence of inflation may put a medium-term break on the rate-cutting programme, lower interest rates could give the economy the boost it so desperately needs.’

Neil Rudge, chief banking officer for commercial at Shawbrook, said: ‘For SMEs, the landscape remains an uncertain one with the looming rise in employer NIC contributions set to take effect in a matter of weeks.

‘Despite the hurdles that lie in wait, more than three-quarters of SMEs remain confident in their business prospects in the next 12 months. Owners and management teams are no strangers to volatility over the past few years.’

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