BOE Cuts Rates to 4.25% in Three-Way Split As Tariffs Hit Growth

The Bank of England cut interest rates by a quarter point to 4.25% as Donald Trump’s global trade war weighs on UK growth, in a decision that split senior officials into three groups and was made before the US President hinted at an imminent deal to lower tariffs on British exports.

Five members of the BOE’s Monetary Policy Committee voted for a quarter-point cut, while two wanted a larger half-point reduction. Another two voted to hold rates. The committee held its guidance that easing should continue to be “gradual and careful” in light of volatility in the global economy caused by Trump’s sweeping tariffs.

“Inflationary pressures have continued to ease so we’ve been able to cut rates again today,” Governor Andrew Bailey said in a statement accompanying the decision. “The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach.”

The BOE’s rate-setters typically vote on the day before the decision is announced. Hours after their meeting on Wednesday, Trump said the US was close to revealing a trade agreement with a major country, which was later reported to be the UK.

Despite the prospect of a deal, the BOE made clear that main threat to the UK is from the global impact of US tariffs on Britain’s open economy. The BOE said the hit to activity due to higher costs and greater uncertainty would knock 0.3 percentage points off UK output over three years and lower inflation by 0.2 percentage points over two years.

Since the BOE’s last policy decision in March, Trump has imposed blanket 10% global tariffs on goods, 25% duties on cars, steel and aluminum, and has effectively embargoed Chinese products with 145% levies. Beijing struck back with 125% levies of its own. The BOE assumed those policies remain in place.

The three-way split on the Monetary Policy Committee underscored the confusion sown by the US trade plans. External members Swati Dhingra and Alan Taylor voted for a half-point cut, arguing that “global developments in energy and trade policy pointed to potential downward risks to global growth and world export prices.”

BOE Chief Economist Huw Pill and external member Catherine Mann preferred to hold rates, which they said partly reflected the recent easing in financial conditions that has lowered market borrowing costs by 40 basis points since March. They are also more concerned about inflationary persistence due to structural supply side problems in the UK.

The decision came a day after the Federal Reserve held US rates in a range of 4.25% to 4.5%, with Chair Jerome Powell - who has been frequently attacked by Trump — making clear the central bank won’t be rushed into easing until there is more certainty on the direction of trade policy.

The forecasts in the BOE’s Monetary Policy Report effectively endorsed the market curve for three more cuts by December, taking interest rates to 3.5%. On that path, inflation is at the 2% target by the first quarter of 2027. The BOE now expects inflation to peak at 3.5% in the third quarter of this year, below the 3.7% previously expected, largely due to falling energy prices.

Even after the rate cuts, monetary policy is still bearing down on growth and inflation, the bank said. While the risk to growth is “somewhat to the downside,” the risks to inflation remain “two-sided,” it added. As a result, the committee will “remain sensitive to heightened unpredictability.”

The BOE also produced two scenarios to help calibrate decision making. The first assumes elevated uncertainty caused by chaotic trade policy hits activity and lowers inflation. The second models weak growth but higher inflation, due supply chain shocks.

The BOE upgraded growth this year to 1% from 0.7% and lowered next year to 1.25% from 1.5%. The 2027 outlook is unchanged. It struck a note of caution about the sharp 0.6% increase in growth in the first quarter, which was largely accounted for by “erratic factors” as sales of good were brought forward to avoid tariffs. The BOE estimates that the underlying rate of growth in the first quarter was “around zero.”

The bank did not update its assumptions of how the £26 billion increase in employers’ national insurance contributions will feed through to jobs, prices and profit margins. The BOE sees unemployment slightly higher this year and next at 5%, up from 4.75%, and for wage growth to continue slowing to 3.75% by the end of this year, which would be roughly consistent with inflation at the 2% target.

Source: Bloomberg Europe