Bank of England slashes rates to 4.25% as tariffs threaten growth

The Bank of England (BoE) has reduced its benchmark interest rate by 0.25 percentage points to 4.25%. This is the central bank’s first rate cut of the year and comes amid growing concerns about global trade tensions triggered by new US tariffs.

The move from the Bank’s Monetary Policy Committee (MPC) marks the fourth rate cut since August 2024. It also warned that the UK economy would slow by a further 0.3% over the next three years in addition to dramatic cuts to its forecasts made earlier this year.

In a setback for Chancellor Rachel Reeves, the MPC warned that a combination of uncertainty surrounding the impact of US trade policy and clouds hanging over the UK economy meant economic growth would be almost stagnant for the rest of the year.

Governor Andrew Bailey said the global outlook had become more uncertain. He noted that the past couple of weeks had shown how volatile the global economy could be, which was why the Bank of England took a cautious and phased approach.

The MPC was at loggerheads. Five of the nine officials voted in favor of the 0.25-point cut. Two preferred a more aggressive 0.5% reduction. The two others voted to keep the rate unchanged.

This three-way division is unusual and reflects the extent of disagreement within the Bank. Economists Swati Dhingra and external member Alan Taylor lobbied to cut rates more deeply because demand is slackening.

Chief Economists Huw Pill and Catherine Mann also expressed worry that inflation remains too high and favored keeping rates on hold. The final vote, 5 to 4 in favor of a smaller cut, demonstrates how closely the decision was divided.

Tariffs trigger global shock, forcing BoE to act

The Bank of England cut came after President Donald Trump announced sweeping new import tariffs from major trade partners, including many of the country’s allies like the UK and the EU. The move spurred a sell-off in global markets and revived trade war fears.

The Bank warned that the new tariffs would contract the UK economy. While the immediate effect on British exports is expected to be modest, officials are more concerned about the broader disruption to global trade that could weigh heavily on growth.

Two-thirds of the projected growth drag comes from the global shock, not direct UK-US trade. The IMF has already cut its estimate for global growth. The BoE piled in behind it, slashing its 2026 UK growth forecast from 1.5% to 1.25%.

In the short term, it sees GDP growing 1% this year, a tad above its previous forecast, but warns that recent growth seems “erratic.”

BoE signals cooling inflation but warns of lingering risks

This change of perspective indicates declining energy prices and slowing pay growth. Wage growth, now in the vicinity of 6%, should slow to 3.75% by year-end.

However, risks to the economy persist. The Bank has also designed two new alternative economic scenarios.

In the first, prolonged policy uncertainty prompts consumers and businesses to hold back on spending and investment, further weakening growth. In the second, stagnant labor productivity combined with persistent wages could trigger a wage-price spiral, pushing inflation higher and making additional rate cuts far more precarious.

The British pound rose modestly against the dollar, and yields on British government bonds dipped as investors started to anticipate deeper cuts.

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