Bank of England back on the defensive as interest rates held

Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.

The decision to hold interest rates at 3.75% is no shock, as the Bank of England goes back on the defensive as inflation starts to rise again.

After months of slow progress, the situation has changed. Inflation rose from 3% in February to 3.3% in March, and inflation may rise as high as 4%.

The spark for a renewed inflation threat is not hard to find. The escalating crisis in the Middle East is once again pushing energy markets higher, feeding through to UK prices at an alarming pace. At the same time, domestic inflation has not been tamed. Wage growth remains sticky and services inflation is elevated.

There is a clear global echo too. The European Central Bank, the Bank of England, and the US Federal Reserve will all hold interest rates for now, as they face the same uncomfortable reality of inflation driven by global events.

Cutting interest rates in this environment is not an option. But it’s not necessarily time for monetary tightening either. The inflationary forecast is worrying, but unlikely to reach the highs of over 10% seen in 2022-23, allowing the Bank the breathing space to hold fire and prevent restricting the economy any further.

With the prospect of interest rate cuts this year quickly diminishing, households face prolonged pain as borrowing costs remain elevated for longer. Businesses, already cautious, are likely to pull back further as financing remains expensive and demand uncertain.

The long-term picture of the UK economy is still uncertain, but it is becoming clearer that weak growth, coupled with rising inflation pressure, will be a defining characteristic.