The Bank of England cut interest rates on Thursday for the third time in about six months, amid signs of weak economic growth in Britain and an unexpected slowdown in inflation. But it warned that there would be a temporary pick up in inflation and that a possible global trade war could weigh on the economy.
Policymakers cut the key rate a quarter point to 4.5 percent as the bank lowered its forecasts for economic growth this year, after months of stagnation.
“We live in an uncertain world, and the road ahead will have bumps,” said Andrew Bailey, the governor of the central bank.
Though he said that inflation was also likely to rise through most of this year, policymakers still expected the inflation rate to return to the 2 percent target in the next few years.
Policymakers expect to cut interest rates further, Mr. Bailey said. “But we will have to judge meeting by meeting how far and how fast.”
The inflation rate slowed slightly to 2.5 percent in December, when economists had been expecting it to hold steady. Crucially, inflation in the services sector, which has been particularly stubborn, slowed to 4.4 percent, from 5 percent in November, opening the door to Thursday’s rate cut.
Even as inflation has dropped substantially from its double digit highs just a couple of years ago, the Bank of England has been particularly cautious in easing monetary policy. Last year, it cut rates by less than its counterparts in the United States, Canada and the eurozone.
British policymakers remained concerned about lingering inflationary risks, particularly as wage growth remained relatively strong, and uncertain about the impact of recent spending and tax changes by the government.
On Thursday, the bank said it expected inflation to accelerate this year, peaking at 3.7 percent in the third quarter, in part because of rising energy costs. That’s nearly a full percentage point higher than the forecast three months ago. But policymakers said they did not expect a jump in inflation to persist for a long time.
In the past few weeks, central bankers in Britain and elsewhere have been grappling with the risk of a global trade war. Economists say that President Trump’s threats of higher tariffs and any retaliation would be a drag on economic growth, although the impact on inflation would be harder to predict.
Britain has not been the target of threats from Mr. Trump, unlike the country’s largest trading partner, the European Union. But a trade war between the United States and Europe could weigh on the British economy, which has already been experiencing lackluster growth. The central bank said that more uncertainty could make businesses cautious about investing in the short term.
The bank downgraded its growth forecasts for the year, to 0.75 percent from 1.5 percent. Mr. Bailey said the economy would be “notably weaker” at the start of the year before picking up again midyear.
On Thursday, two members of the nine-person rate-setting committee voted to lower rates by a larger half-point move, including Catherine Mann, who had previously been suggesting that Britain needed to keep interest rates high to squeeze out inflation. Traders have increased their bets on how many more times the Bank of England will cut rates this year, now expecting three more cuts. Before the rate announcement, Britain’s benchmark stock index, the FTSE 100, hit a record high.
Still, British policymakers have been more cautious in easing policy than their counterparts in the eurozone as they wait to see how additional government spending feeds through to the economy and how British employers might respond to tax increases that will go into effect in April.
Some companies have already responded by cutting jobs. If more follow, that could further weaken the economy and add to pressure to keep cutting rates. But other companies might pass on the higher tax bills to customers through higher prices, adding inflationary pressures. The bank forecast some increase in inflation from the higher taxes.
There is increased uncertainty and risks to inflation both accelerating and falling faster than expected for the British and global economies, Mr. Bailey said, adding, “We must also proceed carefully, judging the evidence afresh at each meeting.”
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