Background on the Bank of England and its Role
The Bank of England (BoE) is the central bank of the United Kingdom, responsible for implementing monetary policy to maintain price stability and support the government’s economic objectives. It plays a crucial role in managing the country’s money supply, setting interest rates, and ensuring financial stability.
Interest Rate Decision
On Thursday, the Bank of England reduced its main interest rate by 25 basis points to 4.25%. This decision came despite an unexpected three-way split among policymakers, driven by concerns over the impact of US President Donald Trump‘s tariffs on global economic growth.
The Monetary Policy Committee voted 5-4 in favor of the rate cut, with two members, Swati Dhingra and Alan Taylor, advocating for a larger reduction of half a percentage point. Meanwhile, Chief Economist Huw Pill and external member Catherine Mann wanted to keep rates unchanged.
Context and Reasons for the Rate Cut
The BoE’s decision follows President Trump’s announcement of broad tariffs on April 2, which caused temporary market turbulence and led the International Monetary Fund to downgrade growth forecasts for major economies, including the UK.
The Bank of England acknowledged that the tariff increases by the US and other countries would somewhat dampen UK economic growth and put downward pressure on inflation. However, they emphasized the uncertainty surrounding economic prospects.
“The past few weeks have shown how unpredictable the global economy can be. This is why we must maintain a cautious and gradual approach to further rate cuts,” said Bank of England Governor Andrew Bailey.
Comparison with Other Central Banks
Since mid-2023, the Bank of England has reduced interest rates by the same magnitude as the US Federal Reserve but less than the European Central Bank, due to concerns about wage growth and inflation risks persistently above target.
Trade Tensions and Future Outlook
The Bank of England stated it had no predetermined path for interest rates and maintained its “gradual and measured” language regarding rate expectations. However, meeting minutes indicated that the impact of global trade tensions should not be overstated.
Some investors had anticipated a faster pace of rate cuts this year. Yet, a rate cut would have been less likely this month without the tariff burden. Three policymakers who voted for a quarter-point cut said their decision would have been “finely balanced” without the tariffs’ implementation, according to meeting minutes.
Tariff Impact on the UK Economy
Based on the situation as of April 29, the Bank of England estimates that US tariffs will shrink the UK economy by 0.3% over three years and assist in bringing inflation back to target.
An agreement is expected on Thursday between the US and the UK to reduce some of Trump’s tariffs on British exports. Nevertheless, the Bank of England stated that about two-thirds of the projected growth damage was due to broader tariff effects on the global economy rather than direct tariffs on British products.
Inflation and Growth Projections
Prior to the Bank of England’s announcement, financial markets anticipated UK interest rates falling to around 3.5% by year-end, down from early February’s expectations of 3.75% or 4%. This was before the extent of Trump’s trade plans became clear.
Updated Forecasts
In a Thursday quarterly update, the Bank of England lowered its inflation expectations for the year to around 3.5%, below the previous forecast of roughly 3.75%. This is above March’s official reading of 2.6%, as higher energy and water bills take effect from April.
The Bank of England expects inflation to return to its 2% target by the first quarter of 2027—nine months earlier than previously projected. Within two years, the Committee of Monetary Policy anticipates inflation to fall to 1.9%, below the previous forecast of 2.3%.
Economic Growth Projections
The Bank of England expects the economy to grow by 1% this year, slightly more than the February forecast of 0.75%, thanks to strong performance in late 2024 and solid official data from early 2025. However, the central bank noted that the growth rebound in the first quarter appeared erratic.
It reduced its 2026 growth forecast from 1.5% to 1.25%, and stated that the underlying quarterly growth rate of the economy was only 0.1%.
Key Questions and Answers
- What is the Bank of England’s role? The Bank of England is the central bank of the United Kingdom, responsible for implementing monetary policy to maintain price stability and support the government’s economic objectives.
- Why did the Bank of England cut interest rates? The Bank of England reduced its main interest rate to 4.25% amid concerns over the impact of US President Donald Trump’s tariffs on global economic growth.
- What are the updated inflation and growth projections? The Bank of England expects inflation to return to its 2% target by the first quarter of 2027 and anticipates economic growth of 1% for the year.
