The Bank’s decision to hold rates did not come as a surprise but the vote was definitive.
It suggests concerns about inflation are niggling away at policymakers, even though economic growth has gone into reverse.
The headwinds are coming from home and abroad. Donald Trump has injected a big dose of uncertainty into the global economy and policymakers are grappling with the possible fall out, both for growth and inflation.
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That was the backdrop to today’s decision. While financial markets were confident that the Bank would respond by holding rates, it wasn’t a given. Policy uncertainty is also bad for the economy and we are struggling on the growth front.
The economy is stagnating and the jobs market is cooling, with a sharper slowdown coming down the road when Rachel Reeves’ National Insurance contribution increases come into force next month.
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The spring statement later this month is also likely to include big spending cuts and possible tax rises, which could depress economic activity. Usually this would be a strong cue for policymakers to start cutting rates and, for months now, there has been a growing clamour urging them to move faster.
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Yet, they were almost unanimous in deciding to pause. Why?
The picture is complicated because the inflationary tiger is still lurking and the fear is that a temporary jump in inflation could become embedded.
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Ultimately, getting inflation down to 2% is the Bank’s core mission. CPI is above target at 3% and wage growth is even higher, pushing 6%. The Bank is also increasingly concerned about the capacity of the economy, chiefly its ability to soak up more growth without prices having to rise.
Then there’s Trump.
The UK is not in the US President’s direct firing line bar tariffs on some metals and the Bank was relatively calm about the economic impact of Trump’s tariff policy- for now. However, it was less certain about the impact on inflation. On the one hand a global rise in manufacturing costs could spur inflation higher. On the other hand, imports could become cheaper if our currency devalues relative to others. It’s an uncertain picture.
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We have a relatively small, open economy, leaving us vulnerable to global fluctuations. That’s something Dave Ramsden, the bank’s deputy governor, flagged in a speech in South Africa a couple of weeks ago.
It means we are still grappling with the worst of all possible worlds : Creeping inflation and weak economic growth. That’s not an easy one to navigate for the Bank of England.
