UK Interest Rates Become More Uncertain Due To Global Trade Turbulence

The Governor of the Bank of England, Andrew Bailey, has warned that the future course of UK interest rates is becoming increasingly uncertain, largely affected by global trade disruptions attributed to Donald Trump’s policies on tariffs and trade deals.

Bailey, addressing MPs during a session with the cross-party Treasury select committee, stated that while the general trend for interest rates remains downwards, the extent and pace of these cuts are “shrouded in much greater uncertainty.” The comments come against the backdrop of four consecutive rate cuts by the Bank’s Monetary Policy Committee (MPC) over the past year, with rates currently standing at 4.25%, as inflation continues to recede.

The Governor highlighted that many businesses had pressed pause on investment decisions due to the unpredictable nature of international trade policies. The fragmentation of the global trading system, he explained, has had a negative impact on world growth and activity, further exacerbating uncertainties. Bailey said, “The breakdown of long-established trade agreements and the rise in tariffs have very serious consequences for the global economy.” He emphasised that these challenges particularly affect the UK, given its position as an open economy highly integrated with global markets.

Bailey offered some cautious optimism over wage trends, noting evidence that wage growth in the UK appears to be cooling. He predicted wage settlements could dip to around 3.7%-3.8% by the end of the year, down from their current higher levels. A decline in wage pressures could give the MPC more confidence to continue lowering rates.

Market volatility due to developments in US trade policy was another area of concern raised by Bailey. He noted that financial markets have experienced significant shifts in response to erratic US decisions on tariffs and foreign trade. The Governor described periods of acute market turbulence, marked by falling equity markets coinciding with rising US bond yields and a depreciating US dollar. These moments led to shifts in White House policy, albeit temporarily. Bailey reaffirmed the need to monitor these dynamics closely as markets seem to be pricing in optimism regarding the resolution of trade conflicts.

External members of the MPC also shared their views on monetary policy direction. Swati Dhingra, a trade expert, expressed concerns about the potentially long-term damage of keeping rates high. Dhingra hinted at support for more substantial rate reductions to stimulate economic growth. Catherine Mann, another MPC member, advocated for clearer, bolder steps to signal the UK’s monetary policy stance, suggesting that a larger rate cut followed by a sustained period of stability could prove more effective.

The Bank of England continues to navigate a period of heightened uncertainty, balancing domestic economic conditions with the unpredictable external environment. Its decisions in the coming months will likely be critical in determining how the UK economy adapts to these global challenges.