Market News

BY  LaToya Harding · Business Reporter, Yahoo Finance UK

The Bank of England (BoE) expects a rise in UK inflation this year, although it will be "nothing like a few years ago".

This was according to BoE governor Andrew Bailey, who appeared before the Treasury committee on Wednesday along with other policymakers.

He said that Britain was entering a world of “even greater uncertainty," which had “widened” since the last meeting in February, when the monetary policy committee (MPC) voted to cut interest rates to 4.5%.

The comments on Wednesday caused the pound (GBPUSD=X) to rise. Sterling was already trading higher against the US greenback thanks to Donald Trump’s tariff plans, which have raised concerns about a potential hit to the American economy.

Meanwhile, the dollar has been sliding amid “Trumpcession” fears, and has lost 0.9% against a basket of other major currencies. The dollar index fell to 104.75.

Read more: Investors aren't cheering for Fed rate cuts anymore

Present at the meeting alongside Bailey were senior officials including Huw Pill, Megan Greene and Alan Taylor.

Greene told MPs that tariff retaliation might actually damage Britain's growth, and would also push down inflation, all things being equal.

She said tariffs would have an impact on exchange rates but warned the outlook was “most uncertain”.

"If there were unilateral tariffs by the US, let’s say, on the UK, economic theory suggests that the dollar should appreciate relative to the pound. That might be mitigated by the fact a lot of trade is already invoiced in US dollars but in any case if that were to happen that would put upward pressure on UK inflation and growth.

“If there were retaliation, however, that would put downward pressure on the US dollar and the opposite would happen, so you would see downward pressure on UK growth and inflation.”

She added: “We saw tariffs imposed yesterday, for example, unilaterally and the dollar actually depreciated relative to the countries’ currencies that it imposed tariffs on. So this is highly uncertain.”

Read more: Pound boosted by weakening dollar as 'Trumpcession' fears play out

It comes as most officials at Threadneedle Street have taken the view that rates should stay higher for longer in order to counter the risk of elevated inflationary pressures.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “For now, we think that most officials will reinforce the view that a ‘gradual’ pace of cuts remains warranted, which would probably cement market expectations for just two more UK rate cuts during the remainder of the year.”

Alan Taylor, a professor at New York’s Columbia University and an external member of the MPC, echoed concerns, pointing to recent a series of global economic shocks such as Brexit, the COVID-19 pandemic, and Russia’s invasion of Ukraine.

"We are living in an age of uncertainty," he said. "Those kinds of shocks leave big scars. When you have uncertainty, it will feed through first into demand," he said.

The BoE reduced its interest rate to 4.5% in February, its lowest level in 20 months, offering some relief to mortgage holders across the UK.

This was the third cut to UK borrowing costs in the current cycle, following reductions in August and November last year.

The next decision on interest rates will be announced on Thursday 20 March.