These are challenging times for central bankers. After steering through the Covid-19 pandemic, and then the energy shock after the Russia-Ukraine war, they must now set monetary policy in the face of an unpredictable trade war, and conflict in the Middle East.
Faced with such uncertainty, the Bank of England is expected to sit on its hands today when it sets UK interest rates.
According to the money markets, there’s a 96% chance that the BoE leaves rates on hold at 4.25% at noon today, and only a 4% possibility of a quarter-point cut (which would bring Bank rate down to 4%).
Zara Nokes, global market analyst at JP Morgan Asset Management (JPMAM), says UK inflation is still “uncomfortably high”, adding: "Escalating tensions in the Middle East, and the upward pressure this is putting on oil prices, will only add to the Bank of England’s concern about easing rates too quickly.
"The monetary policy committee will face a tougher choice when meeting again in August, given the combination of still-sticky inflation and evidence that the labour market is quite clearly cooling. A deterioration in the labour market should, in theory, put downward pressure on inflation, but until there are clear signs of this in the hard data, the Bank should be careful not to claim victory over inflation quite yet, not least because of the uncertain geopolitical climate.”
The Bank has cut rates four times in the last year, having lifted borrowing costs through 2022 and 2023 as it battled inflation. The money markets currently predict it will manage two more quarter-point cuts by the end of 2025.Last night, America’s central bank left US interest rates on hold, but also lowered its forecasts for economic growth.
Federal Reserve chair Jerome Powell warned that the tariffs imposed by Donald Trump on imports would add to inflationary pressures, saying: “Increases in tariffs this year are likely to push up prices and weigh on economic activity.
"The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It’s also possible that the inflationary effects could be more persistent.”
The UK’s new trade deal with the US should mean Britain is less affected by the global trade war, but as an open economy it would still feel the knock-on impact of trade disruption.That could mean higher prices, meaning less pressure to cut rate, or lower growth, requiring lower borrowing costs to stimulate.
The agenda • 8.30am BST: Swiss National Bank interest rate decision • 9am BST: Norges Bank interest rate decision • Noon BST: Bank of England interest rate decision • Noon BST: Bank of Turkey interest rate decision
You are receiving this email because you are a subscriber to Business Today. Guardian News & Media Limited - a member of Guardian Media Group PLC. Registered Office: Kings Place, 90 York Way, London, N1 9GU. Registered in England No. 908396
HS2: a complete failure by the British state and its politicians 
Will the new Middle East crisis rock the world economy? The markets say no – but I fear they’re wrong 
