UK interest rates will go down gradually, says Bank of England

The Bank of England has warned economic and global trade uncertainty has “intensified” as it held UK interest rates at 4.5%.

US trade tariffs and retaliation to the import taxes from the likes of the EU have created uncertainty for countries, the Bank said.

Its decision to hold rates was widely expected, but governor Andrew Bailey said the Bank still believed rates were “on a gradually declining path”.

Analysts are predicting two more rate cuts by the end of the year, with many suggesting the next could come in May.

Mr Bailey reiterated it was the Bank’s job “to make sure that inflation stays low and stable”. Inflation, which measures the rate at which prices rise, currently remains above the Bank’s 2% target, at 3%.

“There’s a lot of economic uncertainty at the moment,” he added. “We’ll be looking very closely at how the global and domestic economies are evolving.”

The Bank’s Monetary Policy committee (MPC), which sets rates, voted by a majority of eight to one in favour of holding at 4.5%.

The base interest rate dictates the rates set by High Street banks and lenders. The relatively higher level in recent years has meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns.

About 600,000 homeowners have a mortgage that tracks the Bank’s rate, so the latest decision will not have any immediate impact on monthly repayments.

More than eight in 10 customers have fixed-rate deals, so they face higher repayment costs when deals end. On Thursday, the average two-year fixed mortgage rate was 5.33%, while the average five-year fix was 5.18%.

Mortgage rates have been edging down recently, primarily because the markets and lenders expect further rate cuts this year.

Louise Gibson, who lives in a one-bedroom flat in Epsom, Surrey, is facing much higher repayments when her five-year fixed rate mortgage at 1.52% ends in October.

The volunteering manager said she was already cutting back her spending by going out less with friends and to the theatre.

“I’m petrified about what the next five years will look like and I have no idea about how I am going to find hundreds of pounds extra to pay for my mortgage,” the 46-year-old said.

Ms Gibson said she was considering extending her mortgage term to reduce her monthly payments.

While inflation is much lower than in recent years, households are still feeling the pain of higher prices and are set to be hit by a host of higher bills for water, energy and council tax from April.

On Thursday, figures from the Office for National Statistics said direct debit failures had increased by 2% in February compared with January, which it said was driven in part by people missing loans and mortgage repayments.

Trade tariffs imposed by the US also threaten to push up prices for UK businesses exporting across the Atlantic. The Bank said most firms were in “wait and see” mode, as they also face a hike in National Insurance contributions (NICs) next month.

US President Donald Trump has imposed a range of tariffs on billions of dollars worth of goods coming into the US from some of its top trading partners, sparking a trade war as the likes of the EU and Canada have hit back with tariffs of their own.

Tariffs are paid by the domestic company importing goods, which means prices for consumers could rise if businesses choose to pass on the extra costs, but Trump has argued the measures will protect American industry and boost manufacturing.

“Exporters to the US are nervous about potential adverse demand impacts of tariffs, but there may be opportunities in other markets,” the Bank said.

It added feedback from across the UK suggested more firms were reporting hiring pauses or freezes and noted that businesses, especially in the services sector such as pubs, cafes or hairdressers, would likely pass the cost of the increase in NICs to customers.

“Some businesses are waiting to see how current conditions evolve before committing to spend and some are already cutting back on plans,” the Bank said.

It added the latest data on wages suggested an “easing in pay growth over the course of the year” for workers.

The Bank has forecast inflation to rise further this year to 3.7%, and stay above its 2% target until the end of 2027.

There have been three rate cuts since August 2024 after previous hikes to try to combat high inflation, which was driven by energy and food prices soaring in the aftermath of the Covid pandemic and the war in Ukraine.

The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.

But it is a balancing act as high interest rates can harm the economy as businesses hold off on investing in production and jobs.

The Bank has previously halved its estimate for how much the UK economy will grow over the next year, contributing to mounting pressure on the government as it has made growing the economy its main priority.

Responding to the Bank’s decision to hold rates, Chancellor Rachel Reeves said: “We’ve had three rate cuts since the summer, but there’s still work to do to ease the cost of living.

“In a changing world I’m determined to go further and faster to kickstart growth and bring in a new era of stability, security and renewal that protects working people and keeps our country safe.”

But shadow chancellor Mel Stride said Reeves’s Budget in October was to blame for inflation remaining above the Bank’s target.