Bank of England warns ‘age of uncertainty’ stopping rapid rate cuts
An “age of uncertainty”, especially over the path of inflation, means that rapid interest rate cuts are unlikely to be coming to the UK, top Bank of England officials have said.
Huw Pill, chief economist at the Bank of England, said the central bank was unlikely to make “larger and more rapid cuts to interest rates” in the future thanks to the path of inflation.
“There is more work to do to squeeze those domestic underlying inflation out of the system. That entails maintaining some restrictiveness in the monetary policy stance,” Pill told MPs at the Treasury Select Committee.
“We’re living in an age of uncertainty,” added Alan Taylor, an external member of the Bank of England’s Monetary Policy Committee (MPC).
US president Donald Trump’s plans for tariffs, energy price increases, and tax hikes in the October Budget, have added to uncertainty over the path of inflation and the economy in recent months.
Bank governor Andrew Bailey said that at “almost every meeting we have with businesses,” the question of National Insurance comes up.
He said that when the rise of National Insurance was announced, economists had been expecting higher prices, lower profit margins and lower employment as a result of those changes.
“We can see all of those… and when we ask firms, that’s exactly the answer we get,” added Bailey, stating that there had been a non-zero impact on inflation from the Budget and that the Bank had heard wages were being cut as a result of the hike.
However, while inflation was a concern for the Bank, Bailey explained that the UK economy was ultimately heading on a long-term path towards a decrease in price hikes.
“We do expect and are beginning to see a pickup in inflation, [but] it’s nothing like we saw a few years ago,” the governor said.
The Bank of England now expects inflation to peak at 3.7 per cent in the third quarter, up from the 1.7 per cent reading in September 2024, which has since ticked up to three per cent in January.
But the expected high point remains considerably lower than the 11.1 per cent price rises the UK saw in October 2022.
Pill agreed, stating that if the UK was at risk of returning to 1970s-level inflation, the Bank would be pursuing “quite strong and immediate action”.
A substantial amount of the price increases expected in coming months was due to energy, said Taylor, as Ofgem’s energy price cap hike had been “a flavour of the energy shock we had before, but much smaller”.
Bailey also spoke about the risks to the UK and global economy from trade wars currently being pursued by president Trump, stating they were “substantial”.
The governor said it would be” a very damaging thing for the world” if the US withdrew from IMF and World Bank, and stressed that trade agreements should be reached through multilateral organisations.
When asked if the policies pursued by Trump could lead to Brits having less money in their pockets, he said: “Yes, that’s right… We serve the people, and we have to take it very seriously.”