Bank of England Cuts Interest Rates

By David Milliken, Suban Abdulla and William Schomberg

LONDON (Reuters) – The Bank of England cut interest rates on Thursday, aiming to address the anticipated impact from U.S. President Donald Trump’s tariffs. A surprising split among policymakers dampened expectations for quicker rate movements.

The BoE’s rate-setters voted 5-4 in favor of reducing borrowing costs by a quarter of a percentage point to 4.25%.

Two Monetary Policy Committee members, Swati Dhingra and Alan Taylor, pushed for a larger half-point cut, while Chief Economist Huw Pill and Catherine Mann preferred to maintain current rates.

No economist polled by Reuters had predicted dissent against the rate cut. Consequently, the pound strengthened and two-year borrowing costs increased as markets adjusted expectations for another rate cut in June.

This decision marked the central bank’s first response following Trump’s April 2 announcement of extensive tariffs, which caused temporary market disruptions and prompted the International Monetary Fund to lower global growth forecasts.

The BoE estimated that increases in U.S. tariffs and others would hinder British economic growth and dampen inflation, but acknowledged the uncertainty ahead. Governor Andrew Bailey stated, “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.”

Since mid-2024, the BoE has now cut rates similarly to the U.S. Federal Reserve, but less than the European Central Bank because of concerns over high wage growth and persistently above-target inflation.

Markets interpreted the two votes favoring a steady rate as a hawkish signal. J.P. Morgan strategist Matthew Landon remarked, “Beneath the hood, we still think that the conditions for cuts remain in place.”

No ‘Autopilot’ for Rates

The BoE underscored that there is no predetermined trajectory for interest rates and cautioned against overstating the effects of global trade tensions. Bailey emphasized that the Monetary Policy Committee must adapt to changing economic conditions, noting that without trade escalations, the decision to cut rates would have been “finely balanced.”

In projections from April 29, the BoE suggested U.S. tariffs could lower British inflation by 0.2 percentage points within two years and shrink the economy by 0.3% after three years.

Later, Trump announced the removal of a 25% tariff on British steel imports and reduced tariffs on cars from 27.5% to 10%, applicable to most other goods.

While Bailey noted that Trump’s changes would help alleviate uncertainty, the BoE indicated that roughly two-thirds of the projected impact on British growth stemmed from the tariffs directly diminishing demand for British exports, with the rest attributable to trade policy uncertainty affecting global growth.

Following the BoE announcement, the likelihood of a further rate cut in June dropped from around 60% to under 20%, as investors anticipated a potential decline to approximately 3.5% by year-end. Two-year gilt yields rose approximately 7 basis points post-announcement.

Bailey explained the market’s reaction by indicating the BoE’s recognition of both upside and downside risks to inflation. The quarterly forecast update revealed the BoE has reduced its inflation expectations slightly for the year, now projecting a peak of about 3.5% instead of the earlier estimate of 3.75%. Inflation is expected to return to the 2% target by the first quarter of 2027, earlier than previously estimated.

Economic growth is projected at 1% for the year, an improvement over February’s forecast of 0.75%, attributed to stronger performance at the end of 2024, while the 2026 growth forecast was diminished from 1.5% to 1.25%.

(Additional reporting by Andy Bruce; Writing by David Milliken and William Schomberg; Editing by Catherine Evans, Alexandra Hudson)