The Bank of England has cut the UK’s official interest rate by a quarter point to 4.25%, a move unanimously expected by markets amid heightened fears of a global recession. This is fourth rate cut in this cycle, which saw interest rates peak at 5.25% in August 2023.
In a statement, the Bank said its monetary policy committee had voted by a majority of five to four to reduce Bank Rate to 4.25%. Two members voted to reduce by 0.5 percentage points to 4%, while two members preferred to maintain Bank Rate at 4.5%.
Tariff Impact Front and Center
As well as falling UK inflation, tariffs imposed by the US government were a key factor in the decision to cut rates, the MPC said.
“These trade policy developments were likely to reduce UK activity, and to create further risks to the downside,” it said.
“The impact on UK inflation was more ambiguous at this stage. The baseline expectation was that these [trade] developments would push down slightly on inflation over the forecast period.”
But there remain risks from weaker demand, disruption to supply chains and further tariff announcements. The statement also noted “the risk of broader fragmentation of the global economy and financial system.”
Morningstar’s chief European market strategist, Michael Field, says that the Bank faces tough choices this year.
“The UK is more insulated from tariffs than countries like Germany certainly, but the inevitable rise in inflation that would come with an escalation of the global trade war could make the Bank’s task tricky.
“Counterbalancing this is the threat of recession in such a situation, which would require the bank to lower rates, exactly the opposite set of actions.”
What Did the Bank of England Say About UK Inflation?
The Bank of England had already said that it expects inflation to rise in the short-term, and it reiterated that view in its quarterly monetary policy report.
The Consumer Prices Index is expected to rise as the year progresses because of higher domestic energy prices, before falling back and hitting the official inflation target of a 2% rate in 2025.
In the press conference following the decision, Governor Andrew Bailey said that the impact of tariffs on UK inflation is still uncertain: the central assumption in the Bank’s forecasts is that the trade war will be deflationary, but supply chain disruption could cause a bout of inflationary pressures. He added the covid pandemic has shown how fragile global supply chains are.
What Did the Bank of England Say About Tariffs and Growth?
The rate decision comes as a US-UK trade deal appeared to be announced by President Donald Trump on his social media channels. In the press conference at the Bank of England, Governor Bailey welcomed the likely deal, congratulating the negotiators and saying that the agreement will remove some of the uncertainty the UK faces in the changed world.
So far the details of the deal have yet to emerge, but around £60 billion of UK goods exports are affected by US tariffs, equivalent to 2% of UK gross domestic product (GDP).
Most UK good exports are subject to minimum tariffs of 10%. Around £13 billion of those—£10 billion of cars and £3 billion of “raw and derived” steel and aluminium products, are subject to a higher tariff rate of 25%.
In its policy update, the Bank said it expected the impact of tariffs on the global economy to be palpable, though the UK was likely to be shielded somewhat from the worst effects.
“Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller,” it said.
“If current trade flows remain unchanged following recent developments, the US effective tariff rate on UK goods exports is estimated to have risen to 11%.
“The negative impact on the level of UK GDP is expected to peak at 0.3% in three years’ time. Of this, 0.2 percentage points reflects the direct impact of increases in tariffs due to lower US demand for UK exports and weaker global activity growth.
“Elevated trade policy uncertainty is assumed to weigh on UK activity by an additional 0.1 percentage point via lower growth in world demand.”
Will the Bank of England Continue to Cut Rates?
This latest rate cut is part of a shift in the trajectory of UK monetary policy, itself the result of material market uncertainty caused by the US government’s use of tariffs to bring global economies to heel.
Market expectations on the path of rate cuts have changed dramatically in the last few months, with more now factored in than just three months ago. The Bank started the year in cautious fashion, with just one rate cut, in February, while the European Central Bank has cut multiple times this year.
“Only two months ago the path of inflation and interest rates in the UK looked relatively straightforward,” says Morningstar’s Field.
“The escalation of the trade war have thrown this up in the air. Based on prior polls of economists, a 25 basis point today was a foregone conclusion, with the signal being that more rates are to follow.”
According to interest rate swaps data, traders now expect the Bank of England to cut rates a further three times in 2025.
Simon Dangoor, head of fixed income macro strategies at Goldman Sachs asset-management, says that more rate cuts are likely than even the market is pricing in.
“We expect three more rate cuts this year and see [the] risk that the Bank could accelerate its easing pace, potentially reaching a 3% terminal rate if economic headwinds intensity and inflation proves less persistent than feared.”
Neil Birrell, chief investment officer, Premier Miton Investors, says that the five-four split on the MPC suggests it’s going to be hard to predict policy this year.
And Schroders’ chief economist, George Brown, says that “going forward, the Bank of England has far less scope to cut rates than the market currently expects.”
“The Bank should … be mindful of signaling an aggressive pace of rate cuts ahead given the elevated uncertainty around how inflation will evolve over the coming months,” says Zara Nokes, global market analyst at J.P. Morgan Asset Management.
For its part, the Bank has avoided clarifying what it intends to do next, as its quarterly monetary policy report made clear. The next monetary policy decision is due in June.
“Monetary policy is not on a preset path. The Committee will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks,” it said.
What Does the Bank of England’s Rate Cut Mean for Mortgage Rates?
Mortgage rates in the UK had already begun to fall in anticipation of today’s news as lenders responded to the end of an era of stamp duty relief with tempting offers.
Floating rate or tracker mortgages follow the Bank of England’s base rate closely, while fixed-rate mortgages follow SONIA, or the Daily Sterling Overnight Index Average, a swap rate published by the Bank too. The latest rate cut will now be factored in to tracker mortgages from today.
As a result, the average two-year fixed mortgage rate has fallen to its lowest level since September 2022—the weeks before the UK’s ill-fated “mini-Budget.”
“Mortgage rates are on a downward trend, which will be welcome news for the millions of borrowers looking to refinance this year,” says Rachel Springall, finance expert at Moneyfacts.
“The mortgage market is undoubtedly calmer now by comparison, despite a rush to reprice fixed deals, but lenders are going to have to work incredibly hard in the coming months to balance new business and keep a close eye on their rate margins.”
James Gard contributed to this article
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
