The Bank of England has cut its main interest rate by a quarter of a percentage point to 4.25%. The decision was announced on Thursday amid concerns about potential global growth shocks. There was a range of opinions within the nine-member Monetary Policy Committee.
Two members voted for a larger half-point cut to 4%, while two others favored holding rates. Bank of England Governor Andrew Bailey said easing inflationary pressures have made this the fourth quarter-point rate cut since August. “The past few weeks have shown how unpredictable the global economy can be,” Bailey said during the Monetary Policy Report press conference.
“That’s why we need to stick to a gradual and careful approach to further rate cuts.”
The rate cut follows recent geopolitical uncertainties and economic indicators that suggest cautious optimism. It also marks the first significant policy move since the news of a potential US-UK trade deal, which is expected to bolster economic ties and commerce between the two countries. The Bank of England stated that “substantial progress” on reducing inflation over the past two years has allowed it to gradually cut rates.
However, it also noted that “uncertainty surrounding global trade policies has intensified” since US President Donald Trump’s tariffs have ignited a trade war in recent weeks. “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,” the central bank said. Bank officials believed that the global trade war was likely to drag on the UK economy, according to the minutes of the bank’s Wednesday policy meeting.
Interest rate cut decision explained
Bailey said he welcomes reports that the United Kingdom and the United States are working towards a trade deal. “It will help to reduce uncertainty,” he said, adding that the UK is “a very open economy” that is affected by the consequences of Trump’s tariffs and trade policies applied to other countries.
“I hope the UK agreement, if it is indeed announced this afternoon, will be the first of many,” Bailey added. Last month, Bailey expressed concern about the potential “growth shock” to the UK from Trump’s tariffs. In an interview, Bailey said the “sheer level of uncertainty” Trump’s trade policy injected into the global economy means that businesses are more likely to hold off making investments and consumers will be less willing to spend.
In April, a closely watched survey of UK businesses indicated a contraction in output. The PMI index based on the survey registered its lowest level since November 2022. Additionally, in April, the International Monetary Fund revised its economic growth forecasts for numerous countries, including the United Kingdom, and raised concerns about economic damage from US tariffs.
Bailey noted that the higher US tariffs could also lower UK inflation, potentially giving the Bank of England more room to cut rates if the economy needed a boost. He cited the potential for goods to be redirected from the United States to Britain. More goods on the market mean more competition, which tends to lower prices.
The Bank of England’s decision reflects ongoing efforts to manage economic stability amid shifting global dynamics. However, the central bank remains committed to a cautious approach to ensure sustainable financial health.