The inflationary effects of President Donald Trump’s tariffs mean the Bank of England could keep the base rate at its current level for longer, according to an economist.
While cutting the base rate from its current level of 4.5% could be a way to stimulate the economy, tariffs tend to have inflationary effects that would only be exacerbated by lower interest rates.
Dr David Crosthwaite, chief economist at BCIS, said: “I remain unconvinced that the base rate will fall to 3.5% by the end of the year.
“Tariffs by their nature tend to be inflationary, so while the Bank of England may need to stimulate the wider economy, they will also be concerned about inflation.”
The Bank’s Monetary Policy Committee will next meet on the 8 May. On 20 March the MPC voted to hold the base rate at 4.5% by eight votes to one.
The UK’s comparatively low tariffs could potentially attract some foreign firms looking to sidestep higher duties elsewhere.
The UK is subject to a 10% tariff, compared to 20% across the EU.
Crosthwaite added: “While I don’t think that the direct impact of the tariff regime will affect the UK construction sector significantly, the indirect impacts could well be substantial.
“The uncertainty for businesses is likely to act as a brake on investment at a time when the government is keen to attract private investment to fund infrastructure delivery.
“In addition, firms may well rein in any investment planned on fixed capital until they have an understanding of the potential hit to their bottom line from the tariffs.
“However, on the flip side, and assuming that the quoted tariffs are long-term and can’t be negotiated via a trade deal, then, given the UK’s lower tariff rate relative to other countries, foreign businesses may look to the UK to set up manufacturing plants here so they can avoid some of the higher-level tariffs.
“An example of that is Apple moving some of its production to India, which has a lower rate relative to China.”