The Bank of England (BoE) has reduced its main interest rate by 0.25 percentage points to 4.25%, navigating a complex global economic landscape shaped in part by new tariffs from the United States.
Divided Committee Signals Uncertainty
The decision, passed with a narrow 5-4 majority, revealed divisions within the Monetary Policy Committee. While two members advocated a steeper 0.5% cut, others preferred to keep rates steady. Chief Economist Huw Pill and Catherine Mann were among those cautious about reducing rates.
“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,” said Governor Andrew Bailey.
Tariffs Add Weight to Rate Cut Decision
This rate adjustment is the first since the U.S. administration imposed broad tariffs in early April. The BoE said the new tariffs would likely drag on growth and reduce inflation in the UK, although it emphasized the broader uncertainty in forecasting outcomes.
If the tariffs had not been implemented, the BoE’s minutes indicated that three votes in favor of the rate cut would have been more hesitant, suggesting the decision was finely balanced.
Adjusted Inflation and Growth Projections
Alongside the rate cut, the BoE revised its inflation outlook. It now expects inflation to peak at 3.5% this year—down from a previous 3.75% forecast—but sees it returning to the 2% target by early 2027, nine months sooner than previously projected.
By 2027, inflation is expected to decline to 1.9%, below the earlier 2.3% estimate. This shift reflects not just tariff effects but also anticipated reductions in energy and utility costs.
Growth and Labor Market Outlook
Economic growth is projected at 1% for 2025, a slight improvement over earlier forecasts thanks to strong momentum in late 2024. However, the BoE remains cautious, noting the erratic nature of recent data. It reduced its 2026 forecast to 1.25% from 1.5%.
Underlying quarterly growth is seen as weak, hovering at just 0.1%. Meanwhile, wage growth is forecast to slow sharply—from nearly 6% to 3.75% by year-end—with unemployment edging up to 5% in 2026 from the current 4.8%.
Preparing for Future Scenarios
In a notable shift, the BoE introduced alternative economic scenarios. One outlines persistent global uncertainty hampering consumer spending and investment. Another considers stagnant productivity and a potential wage-price spiral, which could lift inflation by 0.4 percentage points.
Despite these uncertainties, markets are still pricing in further rate cuts. Expectations now point to rates falling closer to 3.5% by year-end—lower than the 3.75%-4% range expected earlier in 2025.
As trade policies remain in flux, the BoE’s message is clear: flexibility and prudence will guide the path ahead.