The Bank of England (BoE) is expected to cut UK interest rates by a quarter-point to 4.25% this week and signal further reductions amid growing concerns over the impact of US president Donald Trump’s global trade war on UK jobs and growth.
BoE governor Andrew Bailey has signalled that policymakers anticipate tariffs to hit UK economic activity, a key factor in their upcoming rate decision. This will mark the first time Threadneedle Street has formally assessed how Trump's trade policies might affect inflation and the outlook for UK interest rates.
Economists have warned that the ongoing trade tensions could lead to a significant slowdown in global trade, driving up prices and increasing the risk of a US recession — all of which would weigh on the UK's economic growth.
Financial markets are almost certain that the BoE will announce a 25-basis-point cut this Thursday, with some anticipating that one or two members of the Monetary Policy Committee (MPC) may vote for a more substantial 50-basis-point reduction.
Market expectations suggest that the BoE will follow up with further cuts, potentially reducing the benchmark rate to 3.5% by the end of the year — down from 5.25% when it began easing policy last summer. This would represent a faster pace of loosening than previously anticipated, with the BoE having signalled a “gradual and careful” approach in its February forecasts.
Sandra Horsfield, an economist for Investec, said it is a “near-certainty” that borrowing costs will be eased further.
“The new question now though for the MPC to consider is how the US trade policy shifts have changed the outlook for UK inflation,” Horsfield added.
“What makes this month’s decision easy is that virtually everything has pointed in the direction of lower UK inflation pressure.”
Enrique Diaz-Alvarez, chief economist at global financial services firm Ebury, said: “We expect the Bank to revise lower both of its inflation and growth projections for 2025, with the committee likely to say that US tariffs will weigh on UK growth and dampen price pressures.”
While inflation is expected to reach a fresh peak of 3.7% this summer amid a rise in the price of energy and food — almost twice the BoE’s 2% target rate — analysts argue that the elevated interest rate environment, coupled with the ongoing effects of Trump’s trade policies, warrants further action to support the economy through rate cuts.
Edward Allenby, UK economist for Oxford Economics, said that “beyond May’s interest rate decision, the more important question is how US tariff announcements are influencing the MPC’s thinking”. He predicts that the BoE will revise its growth and inflation forecasts downward during this week’s meeting.
Thursday’s decision will be the “first opportunity for the MPC to clearly set out how recent developments have shaped its outlook and what committee members will be focusing on ahead of future interest rate decisions”, he said.
Laith Khalaf, head of investment analysis at AJ Bell, commented:“Donald Trump’s tariffs have caused a massive reappraisal of the future path of UK interest rates. As things stand markets are focusing on the collateral damage to the UK economy rather than the potential for a trade war to ignite inflation once again.
"As a result, the market is now assigning a 50% chance to the base rate being 3.5% or lower by the end of this year. No-one should ink that onto their calendar, because right now the ultimate shape of US trade policy, and its economic effects, are about as clear as a muddy puddle in the dead of night. Forecasts are by their nature vulnerable to correction by unfolding economic reality, and that applies in spades right now."
At Nomura, analysts also expect the BoE to announce a 25-basis-point cut, forecasting further reductions to 3.5% by early 2026. George Buckley, Nomura’s chief European economist, said that while a 50-basis-point cut this week remains unlikely, the chance of a more substantial reduction is higher than the market expects.
“Could the Bank cut by 50bp at its May meeting? We doubt it is likely, but relative to our central view of a 25bp cut we would put the risk of a 50bp cut as considerably higher than the MPC leaving rates on hold,” he said.
Steve Matthews, investment director, Liquidity at Canada Life Asset Management, expects some members of the Bank’s rate-setting monetary policy committee to push for a larger cut, including the external economist Swati Dhingra.
He said: “A 50bps rate cut will be firmly on the agenda at the Bank of England’s upcoming meeting, reflecting a shift in the economic backdrop since March’s pause. Global trade disruption and signs of slowdown — highlighted by the recent quarterly fall in US GDP — have brought a larger drop into focus. With UK CPI inflation now broadly in line with target, we expect MPC members Swati Dhingra and Catherine L Mann to back a 50bps move, opening the door to a potential surprise cut.”
As central banks on both sides of the Atlantic respond to the unfolding economic shocks, financial markets expect the US Federal Reserve to hold rates steady on Wednesday, despite ongoing criticism from the US president. Last month, Trump called Fed chair Jerome Powell a "major loser," suggesting his “termination cannot come fast enough.”
The Bank of England will delay the announcement of its latest interest rate decision by two minutes on Thursday, publishing the decision at 12:02 GMT rather than 12:00, the bank said.
The slightly later timing of the release is due to a national two-minute silence being held to commemorate the 80th anniversary of Victory in Europe (VE) Day.
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