The Bank of England has reduced its key interest rate by 0.25 percentage points to 4.25%, a move reflecting growing concerns over global economic headwinds, particularly those triggered by U.S. trade tariffs. The decision, announced Thursday, revealed a rare split among policymakers as they debated how best to support the UK economy.
The Monetary Policy Committee (MPC) voted 5-4 in favour of the rate cut. Two members, Swati Dhingra and Alan Taylor, pushed for a more aggressive 0.5 percentage point reduction, while Chief Economist Huw Pill and external member Catherine Mann argued to keep rates unchanged. The divided vote underscores the uncertainty facing central banks as geopolitical risks weigh on economic forecasts.
The rate decision is the first since U.S. President Donald Trump introduced sweeping tariffs on April 2, a move that rattled financial markets and led the International Monetary Fund to downgrade growth forecasts globally, including for the UK.
Governor Andrew Bailey said the Bank was taking a cautious approach. “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,” Bailey stated.
The Bank cited expectations that U.S.-driven trade tensions would drag on UK growth and ease inflation pressures, though it stressed that the outlook remained fluid. Officials estimate the U.S. tariffs could shrink the UK economy by 0.3% over three years and accelerate the return of inflation to the 2% target.
Despite cutting its inflation forecast for this year to a peak of 3.5%, down from 3.75%, the Bank noted that inflation had risen recently to 2.6% in March, driven by higher energy and water bills. It now sees inflation falling back to target by early 2027—nine months earlier than previously expected.
The Bank revised its 2025 growth outlook upwards slightly to 1%, citing strong economic momentum in late 2024. However, it trimmed its 2026 forecast to 1.25% and said underlying quarterly growth was a weak 0.1%. Wage growth is also expected to slow from nearly 6% to 3.75% by year-end, with unemployment rising modestly to 5% in 2026.
In its updated economic scenarios, the Bank warned that persistent global trade uncertainty could hamper investment and consumption, while weaker productivity might trigger a wage-price spiral that further complicates inflation control.
Financial markets are now pricing in further rate cuts this year, possibly bringing the rate closer to 3.5% by December.
