The Bank of England cut its main interest rate by a quarter of a percentage point to 4.25% on Thursday amid concerns over the potential shock to global growth emanating from the tariff policies of the Trump administration.
The announcement was made two minutes later than usual as a result of the two-minute silence for Victory in Europe Day.
The decision comes ahead of an expected trade deal between the US and the UK, which will likely lower the burden of President Donald Trump’s sweeping tariffs.
Trump posted on his Truth Social platform that a deal, due to be announced at 10am EDT (2pm GMT), will be a “full and comprehensive one that will cement the relationship between the United States and the United Kingdom for many years to come”.
Though most tariffs were paused for 90 days following the ensuing market turmoil, including the 10% baseline tariff applied to UK goods entering the US, the backdrop for the global economy remains highly uncertain.
“With US trade policy presenting a new demand shock, there have been early signs that the MPC is willing to adopt a more proactive approach to loosening policy,” Edward Allenby, UK economist at Oxford Economics, said before the decision.
Since it started cutting interest rates in August 2024 from the 16-year high of 5.25%, the MPC has been consistent in lowering borrowing costs every three months.
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Price pressures
The Bank of England looked past near-term inflationary risks in the British economy when deciding to lower interest rates on Thursday, focusing instead on threats to growth and downward prices pressures.
UK inflation stands at 2.6% and could well hit double the bank’s target rate of 2% in coming months as a result of a raft of price increases in April, such as domestic energy and water bills.
The imposition of US tariffs on British goods, however, and the potential for a US-China trade war in particular, has the potential to weigh on economic expansion as well as oil prices.
This could actually depress price pressures by lowering demand.
Unlike the Bank of England and the European Central Bank, which last month cut interest rates too, the US Federal Reserve kept rates unchanged Wednesday as its policymakers wait to see how Trump’s tariffs affect the US economy before making any moves.
Inflation rates around the world are way down from levels seen a couple of years ago, partly because central banks dramatically increased borrowing costs from the near zero rates seen during the coronavirus pandemic.