The speed at which UK interest rates can be cut is “shrouded in a lot more uncertainty” due to the “unpredictable” global economic situation and a US-China trade war, the governor of the Bank of England has said.
Andrew Bailey told MPs during a Treasury Committee session that the Bank had “genuine concerns” about escalating trade tensions.
The governor, who was being quizzed alongside fellow members of the Bank’s Monetary Policy Committee (MPC), said it was not clear-cut where UK interest rates will go next.
“I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly,” he told MPs.
“We’ve added the word ‘unpredictable’ to ‘uncertain’ because of the sheer nature of what we’re dealing with.”
The MPC cut rates to 4.25% last month – the fourth reduction in a year.
This decision was led by a slowdown in UK inflation, but the Bank said it had also considered the impact of US President Donald Trump’s tariffs on the UK economy.
Referring to US tariffs, Mr Bailey told MPs that the “impact of fragmenting the world trading system is negative for world growth and activity”.
“It obviously increases uncertainty… and one impact of that is it tends to cause delays and putting off of investment decisions, because they are typically a once-only, irreversible decision.”
The relationship between the US and China is at “the centre” of global trade tensions and is a “genuine concern”, Mr Bailey said.
The Bank chief also said the recent trade agreement struck between the UK and the US was “in the circumstances, a good thing”, but added: “It still leaves the average tariff level higher than it was pre all this starting, and that’s important to bear in mind.
“The UK is a very open economy…. so what affects our economy is not just whatever trade agreements we do, but also what the rest of the world does.
“You could make this point not just about China but also about the EU.”
Mr Bailey reiterated his call for the UK to strengthen trade with the EU post-Brexit, telling the committee: “I do strongly take the view that if we can rebuild trade with the EU, because they are our largest trading partner, then that’s a good thing.”
He added that the system of global trade established after the Second World War had now been “blown up” by the Trump administration.
Mr Bailey said: “That system has now been blown up to a considerable degree and that has very serious consequences for the world economy.”
It came as the Organisation of Economic Cooperation and Development (OECD) cut its projections for global and UK economic growth in 2025 and 2026.
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