Bank of England cut Interest rates to 4.5%

BOE cuts Rates amid Growth Prospects and Tariffs

The Bank of England (BOE) cut its key interest rate by a quarter percentage point to 4.5% in response to slow economic growth and persistent inflation, partly due to President Trump’s tariff threats. This marks the third rate cut since August, and the BOE has lowered its growth forecasts for the UK. The British pound fell, while the FTSE 100 rose, and bond yields decreased. Some policymakers support more aggressive rate cuts, and further reductions are anticipated this year.

This move, aimed at providing economic stimulus, was made despite existing inflation concerns and is expected to benefit both consumers and businesses. The Bank’s decision reflects sufficient progress in controlling inflation and aims to support economic activity amidst global uncertainties. Future rate cuts are anticipated, although there is debate on their extent. Lower rates aim to stimulate economic activity and support businesses. Expectations are for more cuts in future but by how much and timing are the key questions now. 

In addition, there is concern that the UK may be heading into stagflation – weak growth, higher unemployment with inflation.  The government has announced fiscal plans to boost investment in small business, infrastructure (third runway at Heathrow Airport in London), and innovation initiatives.  For innovation, the government is looking to develop a UK Silicon Valley along the stretch from Oxford to Cambridge Universities.  However, let’s wait for things to unfold over the short to medium term as the Bank of England is facing lots of uncertainty.  Of note, if the tariff war hits the European Union and they retaliate against the US that would be bad news for the UK.  Both the EU and US are its two biggest trading partners. 

Key Points

• Interest Rate Cut: BOE reduced rates to 4.5%, marking the third reduction since August, amidst economic uncertainties.
• Economic Concerns: UK’s growth forecast was lowered; potential trade conflicts could further impact growth. Tariffs could push inflation back up again.
• Market Reactions: Pound fell by 1%, FTSE 100 increased by 1.6%, and bond yields dropped.
• Future Expectations: Further rate cuts are expected, potentially reducing rates to 3.75% by year-end.
• Inflation and Growth: Inflation forecast adjusted due to energy prices, with expectations of peaking at 3.7% by summer’s end. Expectations are for inflation to go back to the 2% level perhaps by 2027.