Bank of England cut Interest Rates to 4.25 amid Tariff Deal
Split Decision on BOE Rate Cut Amid Global Uncertainties
The Bank of England (BoE) cut its main interest rate from 4.5% to 4.25% to counteract the expected negative impact of U.S. tariffs announced by President Trump. The decision revealed a split among policymakers, with some opposing the cut or favouring a larger reduction. The move tempered market expectations for further rate cuts in the near term. The BoE also revised down its inflation forecasts and slightly raised its growth outlook but emphasized uncertainty due to global trade tensions.
Key Points
- BoE cut interest rates by 0.25% to 4.25%, surprising markets with a split 5-4 vote.
- Two policymakers opposed the cut; two others wanted a bigger 0.5% reduction.
- Tariffs from the U.S. expected to slow UK economic growth and push inflation higher.
- Markets reduced bets on additional rate cuts in June; sterling and borrowing costs rose.
- BoE downgraded inflation forecast to peak at 3.5%, aiming for 2% by early 2027.
- Economic growth forecast revised slightly up to 1% for the year but with noted risks.
- BoE stressed no predetermined path for rates amid unpredictable global economy.
- S. announced easing some tariffs on British imports, reducing uncertainty somewhat.
The BoE’s decision to cut rates comes amid a backdrop of slowing economic growth in the UK, with recent data showing weaker consumer spending and business investment. The central bank highlighted that the global economic outlook has deteriorated due to escalating trade tensions, particularly between the US and China, which have also affected other major economies.
The meetings this week between the US and China on trade tariffs will have a big impact on the UK outlook and on the UK stock market index – FTSE.
Traders are pricing in two more cuts this year with about a 30% probability of a third cut as implied by looking at the swaps markets.
Impact on the Economy:
Consumer Confidence: The rate cut aims to support consumer confidence and spending by reducing borrowing costs for households and businesses.
Housing Market: Lower interest rates could provide some relief to the UK housing market, which has faced challenges from affordability issues and stricter lending rules.
Inflation Outlook: Despite inflation running above the BoE’s 2% target, the bank expects inflation to moderate in the medium term as global supply chain pressures ease and wage growth stabilizes.
Governor Andrew Bailey highlighted that while inflation remains above target, the risks to economic growth from international uncertainties necessitate a more accommodative monetary policy stance for now.
The mixed vote within the Monetary Policy Committee (MPC) underscores the balancing act policymakers face between supporting growth and containing inflation. Some members expressed concern that cutting rates could stoke inflationary pressures further, while others argued that the external shocks from trade disputes warranted immediate easing to protect the economy.
Looking ahead, the BoE indicated that future rate moves will be highly data-dependent, particularly on how trade developments evolve and their influence on consumer prices and spending. The central bank remains vigilant but ready to adjust its policy as needed to fulfil its mandate of price stability and support sustainable economic activity.
Meanwhile, the partial rollback of U.S. tariffs on British goods provided some relief, but the broader uncertainty surrounding global trade relations continues to weigh on business sentiment and investment decisions in the UK. Market participants will be closely watching upcoming economic indicators and BoE communications for further clues about the likely path of monetary policy in this uncertain environment.
