Events of recent weeks mean all hopes of the Bank of England moving faster to cut interest rates have been extinguished. As such, it comes as very little surprise that the Monetary Policy Committee chose to hold rates at 4.25%, says Lindsay James (Investment strategist at Quilter)
Although there were three votes in favour of a cut, ultimately, inflation continues to drive decision-making, and with the headline figure remaining elevated earlier this week, there is very little movement just now for the committee, and that is before global events are factored in, she said.
“We are still awaiting the full impact of Donald Trump’s tariffs to show up in the prices of goods. We are approaching the end of the 90-day pause on reciprocal tariffs, and what happens from there is really anyone’s guess,” she said.
“Even with the US-UK trade deal, the raft of tariffs on other nations would likely be felt in some form here too. In particular, Europe looks the least likely to cave to Donald Trump, and given it is the UK’s biggest trading partner, there will be knock-on effects.”
Middle East is a more immediate concern
The bigger short-term impact will come from the rising tensions in the Middle East, said James.
She added that any hope of any de-escalation looks slim, particularly given the ‘will he, won’t he?’ type comments from the President on US involvement in the last few days.
“This war will have a significant impact on global energy prices given Iran’s role in oil production. Iranian oil now represents a not insignificant 8% of global production, so any targeting by Israel or the US is going to have a real impact on global oil prices.
“With Iran also not looking like it will surrender at all, it leaves the possibility open that it could do something drastic and cripple global shipping lanes in the Strait of Hormuz. If this were to be shut off to commercial ships, it will cause another inflationary shock.”
A difficult phase to navigate
These issues means it’s such a difficult picture to navigate for the Bank of England, and as such it will act more cautiously, despite a desire from the market for rate cuts, said James.
Despite strong growth in the first quarter of the year, the expectation is that the UK economy will stagnate again in the second half, making the need for rate cuts more prominent.
“But with risks on the global stage not only uncertain but also substantial, the mantra of rates being ‘higher for longer’ will continue,” she said.
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