Donald Trump‘s plan to introduce a wave of tariffs on several countries threatens to raise inflation in the UK and reduce the number of cuts the Bank of England makes to interest rates this year, economists have warned.
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.
Inflation is already higher than the Bank’s target of 2 per cent and though it is widely expected to cut interest rates to 4.5 per cent on Thursday, further growth in the rate of price increases could prevent multiple cuts later in the year, which would likely to lead to slower falls in mortgage costs.
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.
Tariffs mean companies face higher prices for exporting goods, and some of this extra cost is passed to consumers.
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.
UK imports which use parts or products made in countries affected by tariffs will also see price rises, according to economists.
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.”
This is bad news for the Government, which has put growth at the top of its agenda. In a speech last week the Chancellor attempted to reset Labour’s growth agenda after a shaky start to Government saw a flatlining economy partly blamed on her October Budget.
She said: “Economic growth is the number one mission of this Government.
“Without growth, we cannot cut hospital waiting lists or put more police on the streets.”
Pantheon Macreconomics had previously forecast three cuts in 2025, but said this could change to two depending on the impact of tariffs.
Reeves pension raid leaves 50,000 families with extra inheritance tax bill from 2027
Read MoreThomas Pugh, an economist at RSM UK, said that tariff policy posed a risk to his projection of four interest rate cuts in 2025.
He 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.”
He said it was not clear if the Bank would overlook the impact of tariffs as being short term, adding: “Ultimately, the Bank would have to take a view on whether the impact of tariffs would lead to higher medium term inflation or whether lower growth would offset this – either way the outcome is stagflationary.”
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.
Chris Martin, a professor of economics at the University of Bath, said: “The prospect of widespread tariffs, combined with a desire to resist presidential pressure for lower rates, may lead the US Fed [central bank] to delay rate cuts. If so, this could slow the pace of rate cuts in the UK as well.”
Fewer interest rate cuts would be bad news for mortgage holders.
Variable and tracker mortgage rates fall as the Bank of England cuts rates, so these customers would be affected directly.
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.
Mortgage broker Lewis Shaw of Shaw Financial Services said: “If Trump pushes ahead with tariffs, import costs could rise, pushing up prices and, therefore, inflation. That might force the Bank of England to cut rates more cautiously, which could slow lenders’ appetite for mortgage rate reductions.
“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.
“It’s uncertain yet, but mortgage rate cuts might not come as quickly as hoped, especially for the 700,000-plus renewing their mortgages this year.”
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.
Some economists believe the impact on growth would offset any increase in inflation in the Bank’s eyes, which could mean that the number of interest rate cuts is not affected.
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.”
UK inflation fell to 2.5 per cent last month and economists widely expect the Bank to cut rates in its next meeting on Thursday.
But inflation is set to rise later this year, and could rise further as a result of tariffs.
The number of cuts overall in 2025 is likely to be between three and five, according to economist predictions shared with The i Paper, though high tariffs would threaten this.
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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