Bank of England cuts interest rate in split decision
The Bank of England has cut interest rates to 4.25 per cent in a split decision dividing hawks and doves.
The Bank’s policymakers suggested that President Trump’s aggressive tariffs on China were “more likely to be disinflationary than inflationary”, with price growth expected to level off to its two per cent target by the end of 2026.
But members on the Monetary Policy Committee (MPC) did not come to a unanimous agreement on cutting interest rates by 25 basis points, as two external members – Swati Dhingra and Alan Taylor – voted for interest rates to be cut by 50 bps to four per cent.
Chief economist Huw Pill and Catherine Mann, who previously supported a bigger cut than other members in a decision earlier this year, voted for interest rates to be held at 4.5 per cent.
The Bank has also retained its “careful and gradual” approach to monetary policy despite suggestions from leading City analysts that the MPC would signal an acceleration in rate-cutting.
It did leave the possibility of the slogan being dropped at future meetings open, with the minutes to the meeting emphasising that policymaking was not on a “pre-set path” given global economic turmoil in the wake of President Trump’s tariff announcements.
Estimates did not factor in the UK’s imminent trade deal with the US but the Bank assumed that a 90-day reprieve from tariffs on British goods would remain place.
“Inflationary pressures have continued to ease so we’ve been able to cut rates again today,” Governor Andrew Bailey said.
“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 to further rate cuts.
Bank changes inflation forecast
A steep reduction in global energy prices seen over April has prompted the Bank to lower its peak inflation forecast for this year down from 3.75 per cent to 3.5 per cent.
But policymakers warned that households’ fears of prices being ramped up, particularly given recent experiences in dealing with a cost-of-living crisis after Russia’s full-scale invasion of Ukraine and the fallout of former Prime Minister Liz Truss’ mini-budget, had kept inflation expectations high.
The Bank also said its judgement on tariffs easing price growth carried “large risks”.
Dual scenarios considered by the Bank’s policymakers envisaged the potential for tariffs to weigh down on inflation and the possibility of price growth remaining sticky given Brits’ expectations of high price growth.
The dearth of information available to policymakers has put extra pressure on Bailey, who re-iterated his “top priority” was to stabilise inflation.
Trump’s tariffs were highlighted as a “downside” threat to UK GDP in the minutes to the Bank’s meeting.
Yet the Bank nudged its growth forecast for 2025 up to one per cent from a previous prediction of 0.75 per cent due to a surge in output seen in the first three months of the year.
Data provided by the Office for National Statistics (ONS) showing that the UK economy had grown by 0.5 per cent in the first quarter were due to “erratic factors”, according to the Bank’s policymakers, such as a spike in manufacturing activity at the beginning of this year.
Today’s decision may prompt investors to reconsider predictions that three more interest rate cuts will be made this year given the Bank’s continued commitment to taking a “gradual and careful” approach to policymaking.
The Bank has taken a more hawkish view on interest rate-cutting than the European Central Bank (ECB), which has cut interest rates seven times in a period of 18 months.
The Federal Reserve last night held interest rates at a range of 4.25 per cent to 4.5 per cent given major forecasters have suggested that Trump’s tariffs could push up inflation in the US.
Reacting to the decision, Chancellor Rachel Reeves said: “This interest rate cut is welcome news, and the fourth since we came into government making it cheaper for businesses to borrow, reducing the cost of a new mortgage, making homeownership more accessible, car finance more affordable and easing the pressure on those paying off personal loans.
“But there is more to do, and I know families are still facing cost-of-living pressures. In a changing world we’re bringing stability to the public finances and going further and faster to grow the economy, putting more money in the pockets of working people through our plan for change.”