Central banks battle persistent inflation and weakening growth.
Global central banks grapple with decelerating growth and persistent inflationary pressures. The Bank of England maintained its key interest rate, as significant economies on either side of the Atlantic grapple with a challenging combination of sluggish economic growth, escalating inflation, and trade threats from President Trump. The Bank of England maintained its interest rate at 4.5% on Thursday, aligning with the Federal Reserve’s decision made the previous day. The Bank of England reduced interest rates in February. The United Kingdom is confronted with numerous uncertainties, notably the potential for trade disputes instigated by the United States to dampen global economic growth and reduce demand for British exports, even in scenarios where the nation avoids direct tariffs on goods beyond steel and aluminum.
“A significant degree of economic uncertainty persists,” stated BOE Governor Andrew Bailey. “Our assessment indicates that interest rates are likely to follow a trend of gradual decline.” We will closely examine the developments in both the global and domestic economies. At the most recent meeting, one of the two policymakers who had previously advocated for a more substantial reduction in the key rate opted to support a rate cut, while the other aligned with the prevailing consensus.
The Federal Reserve on Wednesday maintained its key interest rate for the second consecutive meeting, concurrently revising its growth outlook downward and increasing its inflation forecasts in light of escalating tariffs. A series of central banks implemented policy decisions following the actions of the Federal Reserve. Switzerland’s central bank has reduced its key interest rate for the fifth consecutive meeting, a decision that analysts anticipate will mark the conclusion of this monetary policy cycle. Sweden’s central bank has opted to maintain its key interest rate, indicating that it is expected to stay at this level throughout the remainder of this year and into the next. Similar to the European Central Bank, both entities have reduced borrowing costs at a pace significantly faster than that of the Bank of England.
The U.S. faces the risk of a deceleration following the robust growth observed in the previous two years. In contrast, the U.K. economy has not experienced similar rapid expansion and has instead stagnated since the onset of Russia’s full-scale invasion of Ukraine, which significantly increased energy prices. The U.K. economy experienced a contraction in January, following a period of stagnation in the latter half of 2024. The Bank of England revised its growth projection for the current year downward, adjusting it to a mere 0.75%, a significant reduction from the previous estimate of double that figure.
Notwithstanding that shortcoming, the inflation rate in the U.K. continues to exceed the Bank of England’s target significantly. The outlook indicates an upward trajectory this year, propelled by a renewed escalation in energy prices and the implementation of a forthcoming employment tax increase next month, which businesses are anticipated to transfer to consumers. A further conundrum for policymakers is that private sector wages are experiencing significant increases, even as indications suggest a cooling demand for labor.
The Bank of England has indicated that the economy may experience further challenges, with potential growth slowing even more should U.S. tariffs on imports increase, despite the U.K. being largely insulated from direct duties. The United Kingdom operates primarily as a services-oriented economy and maintains a relatively modest trade surplus with the United States. However, a significant portion of the services offered by London’s banks, law firms, accountants, and insurers are closely tied to the international movement of goods and capital, and would suffer if these flows were to decline due to increasing trade barriers.
Policymakers have signaled their intention to endorse additional rate reductions this year, albeit at a measured tempo due to ongoing concerns regarding increases in wages and service costs. Market participants anticipate that the Bank of England will maintain its current trajectory of reducing rates by 25 basis points per quarter, extending this approach through the conclusion of the year and into 2026. The Bank of England’s prudence underscores concerns regarding the economy’s capacity to accommodate a rise in consumer demand without triggering inflationary pressures. The U.K. economy has experienced a prolonged period of subdued investment, attributable to a confluence of factors including extensive government spending reductions, the ramifications of Brexit, the impact of the Covid-19 pandemic, and escalating energy prices.
The government’s decision in October to increase employment taxes seems to have imposed an additional burden on the economy. Treasury Chief Rachel Reeves is set to present her strategy for adhering to her self-imposed budgetary constraints next week. Additional increases in business taxes are not anticipated; however, further reductions in spending may present a new challenge.
