The Bank of England cut the UK’s official interest rate by a quarter point to 4.25%.
In a statement along with the quarterly monetary policy report, the bank said the Monetary Policy Committee (MPC) voted in a majority of 5-4 to reduce the bank fee to 0.25% (25 basis points) to 4.25%. Two members reduced by 0.5 percentage points to vote for 4%. The two members preferred to keep their bank fees at 4.5%.
The tariffs imposed by the US government were at the heart of the decision, the MPC said today, but said there was “ambiguity” about the impact on inflation.
“The development of these trade policies is likely to reduce UK activity and pose additional risks on the downside,” he said.
“At this stage, the UK’s impact on inflation was vague. The baseline expectation was that these developments would slightly push inflation down over the forecast period.
“But around this judgment, there was a significant risk on both sides, including the following weak global demand, the degree of exports to non-US markets, and the passthrough from global export prices to domestic consumer prices, which closely coincided with previous experience, with the level of disruption to supply chains, the scope of further tariff policy announcements, and the scope of global economy and financial fragmentation.
In the UK, the FTSE 100 quickly fell into the news, but the UK’s two-year gold leaf yield increased by percentage points accordingly. The expectations for an imminent trade deal with the US were already in support of sentiment before the bank announced.
Will the Bank of England continue to cut fees?
Rate cuts today are part of a change in the UK’s monetary policy trajectory, and in itself is the result of material market uncertainty caused by the US federal government. Use of tariffs to bring global economy to heels.
Market expectations for rate reduction paths have changed dramatically over the past few months and are now being taken into account further. The bank started once a year with a fee reduction in February compared to the European Central Bank multiple.
“Just two months ago, the UK’s inflation and interest rate path seemed relatively easy,” says Morningstar’s chief European market strategist Michael Field.
“The escalation of the trade war is throwing this into the air, and more interest rate cuts can continue.”
Traders now expect the Bank of England to cut its fees three more times in 2025, according to interest rate swap data.
The banks declined to clarify what they intend to do next, as the quarterly monetary policy report revealed today.
“Money policy is not in a pre-established pathway. The committee is sensitive to increasing unpredictability in the economic environment and will continue to update its risk assessment.”
Nevertheless, some commentators are not convinced that market pricing is realistic with many interest rate cuts this year.
“There are a few issues with the assumption,” says Saxo UK Investor Strategist Neil Wilson.
“Going to such a clip – remove cuts in June or September and August as well – faster than one cut at each quarterly pace that they seem to rely on. The latest GDP figures were modestly encouraging. But it will probably be boosted by front running tariffs.
“Secondly, the Global Central Bank is reluctant to commit to a preemptive rate cut in the face of tariffs and is sticking to a waiting approach. Finally, inflation in the service remains at 4.7%.
Field agrees that the Bank of England is facing even more difficult decisions.
“The Bank of England has a job that is unsettling,” he says.
“The UK is certainly more insulated from tariffs than countries like Germany, but the inevitable increase in inflation that comes with the escalation of the World Trade War can make banking tasks more challenging.
“Counterbalance is a recession threat in these circumstances, requiring that banks reduce the set of reverse actions. The stock market is reflected in the level of the day before relaval, even without the certainty of the trade contract, but we believe that some sectors like energy remain behind.
What does the Bank of England interest rate cuts mean in mortgage rates?
The UK mortgage rate was already beginning to fall in anticipation of today’s news as lenders responded to the end of the era of stamp duty relief with attractive offers.
Floating or tracker mortgages closely follow the Bank of England base rates, while fixed rate mortgages follow the daily Sterling Index average, which is a swap rate published by the Sonia, or the bank.
As a result, the average 2-year fixed mortgage rate has fallen to its lowest level since September 2022, since several weeks in the UK. Unlucky “mini budget.””
“Mortgage rates are on the decline, which is welcome news for millions of borrowers seeking refinance this year.”
“The mortgage market is rushing to permanent transactions, which is undoubtedly calm, but lenders will have to work incredibly hard in the coming months to balance their new business and pay attention to rate margins.
“First-time buyers are the life system of the mortgage market and are essential to keeping the market moving. With no one can rely on mom and dad’s banks, borrowers can tire of all their savings to secure their dream home.
“Relaxation into stress testing does not undermine borrowers later, and should be deployed with caution.”
