The Bank of England has said UK businesses are freezing their hiring plans in response to Rachel Reeves’s tax increases and to mounting global uncertainty as it kept interest rates on hold at 4.5%.
Before the chancellor’s spring statement on Wednesday, the bank’s monetary policy committee (MPC) voted eight to one to pause its cycle of rate cuts after three reductions in the past year.
Highlighting the risks from Donald Trump’s escalating trade wars and tax rises hitting the confidence of businesses and consumers, the committee said holding borrowing costs unchanged was warranted, even as the economy struggled for growth.
The Bank’s governor, Andrew Bailey, said: “There’s a lot of economic uncertainty at the moment. We still think that interest rates are on a gradually declining path, but we’ve held them at 4.5% today.
“We’ll be looking very closely at how the global and domestic economies are evolving at our six-weekly rate-setting meetings. Whatever happens, it’s our job to make sure that inflation stays low and stable.”
Financial markets had indicated a 90% probability that Threadneedle Street would not repeat February’s cut, when it lowered its key base rate from 4.75% and halved its UK growth forecast.
Reeves will deliver her statement to the Commons next week against a backdrop of lacklustre domestic growth, stubbornly high inflation and rising global uncertainty as Trump imposes tariffs on the US’s allies and enemies alike. UK GDP unexpectedly fell in January, after having come close stalling in the second half of last year.
The Bank upgraded its forecast for growth in the first quarter from 0.1% to about 0.25% after a stronger end to 2024 than feared, but said the outlook remained highly uncertain amid weak consumer and business sentiment.
Industry groups have criticised the chancellor’s planned £25bn increase in employers’ national insurance contributions, and a 6.7% rise in the minimum wage from April, arguing that they are likely to stoke inflation.
In a blow for the chancellor before the spring statement, the Bank published findings compiled by its network of agents across the country showing that growing numbers of companies were putting their hiring plans on ice.
“Employment intentions are now negative, on balance, with more firms reporting hiring pauses or freezes and saying they will review staffing levels through natural attrition or redundancies if the outlook does not improve,” the report said.
Highlighting “a material increase in total labour costs owing to the changes in employer NICs” alongside the increase in the “national living wage”, it said the rise in labour costs could be up to 10%.
Official figures show the jobs market has proven more resilient than business surveys, with the latest data on Thursday showing unemployment remained the same in January at 4.4% while pay growth stuck at historically high levels.
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The Office for National Statistics has, however, cautioned against the reliability of its official figures because of difficulty compiling its survey since the pandemic.
After the rate decision Reeves said there was still work to do to ease the cost of living, with a focus on driving up economic growth. “In a changing world I’m determined to go further and faster to kickstart growth and bring in a new era of stability, security and renewal that protects working people and keeps our country safe,” she said.
While the majority of the nine-strong MPC voted to keep rates unchanged, preferring to monitor developments before taking action, one member, the external economist Swati Dhingra, was outvoted in pushing for an immediate quarter-point reduction.
Inflation has fallen from a peak of more than 11% in the second half of 2022 after Russia’s invasion of Ukraine triggered a spike in energy prices. But the headline rate remains above the Bank’s 2% target and has increased in recent months, from 2.5% in December to 3% in January. It is expected to climb further in coming months after an increase in household energy costs.
The Bank signalled that it remained open to more “gradual and careful” rate cuts, but City traders bet the next reduction was unlikely to come until August. Financial markets anticipate two more quarter-point cuts this year.
“There appears to be diminishing appetite for cutting rates faster and a growing desire to cut at the current pace at best,” said Paul Dales, the chief UK economist at the consultancy Capital Economics.
“Even so, we still think the weak economy will reduce inflation further ahead and prompt it to resume rate cuts, taking rates below the levels investors expect.”
