In doing so it will put a dent in Rachel Reeves‘s growth plans which the Government is relying on to improve public services, as well as hit Labour’s key performance indicator for the Parliament – whether voters feel better off.
Canada and Mexico are both facing 25 per cent tariffs – taxes on imports – that were postponed on Monday, while China is also facing tariffs and has announced its own on the US in return.
Economists have said that even though tariffs have not been announced on the UK yet, they threaten to increase prices for UK consumers because they can weaken the pound against the dollar – making imports more expensive.
Robert Wood, chief UK economist at Pantheon Macroeconomics, told The i Paper: “US tariffs will be stagflationary [causing lower growth and higher inflation] for the UK even if President Trump spares the UK from direct levies, because gumming up the global trading system will raise prices for everyone. So tariffs will help limit Bank of England rate cuts this year.”
She said: “Economic growth is the number one mission of this Government.
Pantheon Macreconomics had previously forecast three cuts in 2025, but said this could change to two depending on the impact of tariffs.
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Read MoreHe said: “This is a risk. A global trade war would risk pushing up prices across the board, even in the UK isn’t directly targeted, through the general disruption to supply chains and cross border movements of goods. For example, UK firms importing goods from the EU which have US components.”
Higher prices generally as well as mortgage rates would also cause problems for Keir Starmer, who has made real disposable household income – how much people have to spend after essential bills – the key test for voters to judge him by.
Fewer interest rate cuts would be bad news for mortgage holders.
Fixed mortgage rates tend to fall as financial markets predict faster rates of interest rate cuts, and rise as markets believe the rate of cuts to be slowing.
“Swap rates [which play a role in determining mortgage rates] have been falling based on the expectation of cuts, but if markets start pricing in a more hesitant Bank of England stance due to resurgent inflation, that could change rapidly.
The National Institute of Economic and Social Research said that 25 per cent US tariffs on all non-commodity imports from Mexico and Canada, which could come in next month, would increase UK inflation by 0.2 percentage points and decrease the UK growth by around 0.1 percentage points this year.
Paul Dales of Capital Economics said the Bank’s response to any tariffs imposed by Trump would depend on other factors at the time, but said: “I suspect they may focus more on the possible downsides to GDP growth and would be more inclined to cut rates faster or further.”
But inflation is set to rise later this year, and could rise further as a result of tariffs.
The impact of the tariffs on economic growth would also be a concern for the Government.
Latest figures show that GDP rose just 0.1 per cent in November, with lower growth increasing the chance that Reeves has to increase taxes again or deliver real-terms spending cuts to public services.
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