The Bank of England cut the UK’s official interest rate by a quarter point to 4.25%. The decision came just before the announcement of a trade agreement between the US and the UK.
In a statement, the bank said the Monetary Policy Committee was voted by a majority of five to four, reducing the bank fee to 4.25%. Two members voted to reduce 0.5% points to 4%, while the two members preferred to keep their bank fees at 4.5%.
Tariff impact front and center
According to the MPC, tariffs imposed by the UK government are key factors in the decision to cut interest rates.
“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 more vague. The baseline expectation was that these (trade) developments would slightly push inflation down over the forecast period.”
However, there remains risks from weak demand, disruption to chain supply, and the announcement of tariffs. The statement also states “the risk of broader fragmentation of the global economy and the financial system.”
Michael Field, chief European market strategist at Morningstar, says the banks are facing tough choices this year.
“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.
“This is a recession threat in these circumstances, and banks need to lower rates, the exact opposite set of actions.”
What did the Bank of England say about UK inflation?
The Bank of England has already said it expects inflation to rise in the short term, and today it has reiterated its view in its quarterly monetary policy report.
The consumer price index is expected to rise as the year progresses due to rising domestic energy prices. It will then meet the official inflation target of 2% rates in 2025.
In a press conference following the decision, Gov. Andrew Bailey said the impact of tariffs on UK inflation is uncertain.
What did the Bank of England say about tariffs and growth?
The rate decision appears to have been made as President Donald Trump announced it on social media channels. At a press conference at the Bank of England, Governor Bailey welcomed the contract, congratulating negotiators and said the agreement would remove some of the uncertainty that Britain faces in a changing world.
So far, no details on the transaction have been made yet, but are affected by US tariffs, which amount to 2% of UK Gross Domestic Product (GDP).
Most UK good exports are subject to a minimum 10% tariff. Those around 13 billion pounds (100 billion pound cars and 3 billion pounds of “fresh and derivative” steel and aluminum products will have a higher tariff rate of 25%.
In updating the policy, the bank said it expects the impact of tariffs on the global economy to be obvious, but said the UK is likely to be somewhat protected from the worst.
“While the global growth outlook has weakened as a result of this uncertainty and the announcement of new tariffs, the negative impact on UK growth and inflation could be reduced,” he said.
“After recent developments, if current trade flows remain unchanged, it is estimated that the effective US tariff rate on UK goods exports has risen to 11%.
“The negative impact on UK GDP levels is expected to peak at 0.3% over three years, of which 0.2% points reflects the direct impact of increased tariffs due to lower US demand on UK exports and lower growth in global activity.
“The rising uncertainty in trade policy is expected to outperform UK activities by an additional 0.1 percentage points due to low global demand growth.”
Will the Bank of England continue to cut fees?
This latest rate cut is part of a change in the UK’s monetary policy trajectory, and itself is the result of uncertainty in the material market that is responsible for 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, with more factorization now than just three months ago. The banks have carefully started the year, with only one fee cut in February and the European Central Bank cut multiple times this year.
“Just two months ago, the UK’s inflation and interest rate path seemed relatively easy,” says Field Michael Field of Morningstar.
“The escalation of the trade war threw this into the air. Based on past economists’ polls, today’s 25 basis points were a natural conclusion.
Traders now expect the Bank of England to cut its fees three more times in 2025, according to interest rate swap data.
Simon Dangoor, head of bond macro strategy at Goldman Sachs Asset Management, says there is a greater likelihood of interest rate reductions than the market priced.
“We are expecting three more interest rate cuts this year, and there is a risk that banks could accelerate the pace of easing and potentially reach a terminal rate of 3% if economic headwinds prove to be unafraid of intensity and inflation.”
Neil Billel, Chief Investor Prime Minister Mitten, says the five splits in the MPC suggest that policies will be difficult to predict this year.
And George Brown, Schroeder’s chief economist, said “Now the Bank of England will have far less scope to cut than the market expects.”
Banks declined to clarify what they intend to do next, as their quarterly monetary policy reports revealed. The next monetary policy decision is scheduled for June.
“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.”
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. The latest rate reductions will be factored into tracker mortgages starting today.
As a result, the average 2-year fixed mortgage rate in the UK has fallen to its lowest level since September 2022, a few weeks ago. 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 mild, but lenders will have to work incredibly hard to balance their new business and pay attention to rate margins in the coming months.”
