The UK central bank on Thursday cut interest rates by a quarter point to 4.25% as Donald Trump’s trade war dampens outlook for growth.
Analysts said the divided decision from the Bank of England’s Monetary Policy Committee surprised markets by showing a cautious approach toward easing monetary policy.
Five members of the central bank’s committee voted for a quarter-point cut, while two wanted a larger half-point reduction.
Another two members voted to hold rates steady.
The committee maintained its guidance that easing should continue to be gradual and careful in light of volatility in the global economy caused by Trump’s tariffs.
REACTION:
Luke Bartholomew, Deputy Chief Economist, Aberdeen: “No surprises in the Bank’s decision to cut interest rates by 25bps.
“But the Monetary Policy Committee is clearly very divided on how policy should respond to the many shocks currently hitting the economy, with a three-way split in the voting pattern.
“This is highly unusual and will make it hard for the Bank to send a clear signal to the market about the likely path of policy.
“But with the Bank maintaining its guidance that further cuts will be “gradual and careful”, the chance of another cut in June probably have fallen significantly.
“We still think the Bank will cut rates at least twice more later this year, but much like the Fed’s message yesterday, UK policy makers will want to see more data on how tariffs and domestic tax increases are being digested by the economy before moving decisively.
“Bailey may face questions about the UK-US trade deal, but its impact on monetary policy is likely to be relatively modest, even if it may help to further support risk sentiment.”
Nicholas Hyett, Investment Manager at Wealth Club: “With inflation falling, and unexpectedly strong economic growth in February, the Bank of England has a remarkable freedom of movement at the moment. That’s reflected in the MPC vote split this time round – ranging from 4.0% to 4.5%
“Ultimately though the committee has, as expected, used its flexibility to clear the way for a soft landing after a period of moderate but stubbornly rising inflation at the end of last year.
“The government and markets will welcome a little bit of extra padding. Changes to the national living wage and employer national insurance contributions only came into effect in April, and have the potential to spark an uncomfortable combination of rising prices and weaker labour markets.
“So far the economy has dealt with that looming speedbump surprisingly well, but some defensive driving from the Bank is no bad thing in an unpredictable market where key players have been known to suffer from the occasional bit of road rage.”
Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs:
“The Monetary Policy Committee’s majority decision to cut rates by another quarter point today was widely expected and fully justified by the downside risks to inflation and growth. The only real surprise was the split, with two members voting for a half point cut and two for no change.
“The three-way split on the MPC sends mixed signals about the future path of interest rates and may disappoint those looking for more clarity. In part this reflects the variable quality of the official statistics, notably on the state of the labour market.
“Nonetheless, the diversity of views is a fair reflection of the heightened economic uncertainty, both at home and abroad.
“If anything, the lack of groupthink is something to cheer. It would be more worrying if nine rate-setters all came to exactly the same conclusion despite the many unknowns, including the fallout from a global trade war.
“It is also good to see a whole section of the Monetary Policy Report devoted to developments in broad money. This included an acknowledgement that these developments might be signalling downside risks to activity and inflation, albeit with ‘significant uncertainties’.
“Many commentators, including members of the Shadow MPC which meets at the IEA, have been arguing for some time that the Bank has not been paying enough attention to monetary aggregates, so this is another welcome sign that the reral MPC is now taking account of a wider range of perspectives.”
Lindsay James, investment strategist at Quilter: “The Bank of England has opted to cut interest rates to 4.25%, with seven members of the MPC voting to lower rates in a sign of strong agreement around the threat to growth imposed on the UK economy by Trump’s tariffs.
“Indeed, two members wanted to go further and bring rates down to 4%, suggesting more drastic action is being considered as economic growth is forecasted to have stalled, although it should be noted two members opted to leave rates unchanged so the unanimity expected by the market is not there just yet.
“With the cut having been widely anticipated by markets, investors will focus now on the likelihood of a successive cut in June, seen to be in the balance in the run up to today’s meeting. Investors are betting on three further rate cuts this year as rising risks to growth look likely to supersede inflationary threats in the coming months.
“Although we are yet to see the impact on inflation from April’s hike to employer’s National Insurance contributions and national minimum wage, it is expected that much of this will be passed on to consumers through one-off price rises. Offsetting that however is the impact of falling energy prices, with the Energy Price Cap predicted to fall by around 9% in July, although we will see a rise in inflation for the third quarter due to prior energy price increases.
“Nevertheless, there is also the possibility that certain Chinese goods previously destined for the US may now find their way to the UK market, pulling down goods inflation in the process. The government desperately wants consumer confidence to return and will be hoping this rate cut can help turn the tide against the pessimistic economic outlook, especially if a lid can be kept on inflation.
“However, the UK and global economy remains in a period of hiatus as we await the outcome of a 90 day pause in reciprocal tariffs. With the UK and US expected to announce some sort of trade agreement, any retaliation from UK is now firmly off the cards.
“This removes one risk for the MPC in terms of the effect that would have on prices, however with the universal 10% tariff likely to remain in place for the UK, it could also be a case of damage limitation. With further threats on the expansion of tariffs to sectors such as the film industry, it is a reminder that Trump will happily shift the goalposts and make any kind of forward planning for the UK government or businesses next to impossible.”
Kevin Brown, Savings Specialist at Scottish Friendly: “A rate cut has looked like a sure thing since ‘Liberation Day’ in the US derailed the UK’s hopeful recovery. Inflation remains above target, and is expected to go higher still, but the Monetary Policy Committee appears confident that it is temporary. This was the fourth rate cut within 12 months
“The future path of interest rates, however, is less certain. The ongoing tariff situation adds an additional curve ball to the usual uncertainty about economic growth. The ultimate level of the tariffs applied to the UK remains unclear, as is their final impact on households and businesses alike. Tariffs could have an inflationary or deflationary effect.
“The domestic picture is also foggy. Wage growth remains high, which could drive inflation. ‘Awful April’ has seen a series of price hikes from the regulated utilities. On the other hand, pump prices are falling, making it cheaper for drivers to fill up.
“Mortgage holders have already reaped the benefits of the rate cut, which has been reflected in lower fixed rate mortgage costs. However, saving rates could still fall. It is always worth a re-examination of how you are building up your financial resilience – is the nest egg working as hard for you as it could be, especially after this latest rate cut if a chunk of it is in cash?”
Douglas Grant, Group CEO of Manx Financial Group: “The Bank of England’s decision to cut interest rates aligns with the positive news offered by the fall in inflation, providing a potential boost for UK investments after a period of economic stagnation. However, SMEs continue to face geopolitical instability and fragile supply chains demanding diversification and sustainable practices. With investment hesitancy rising, adaptable lending strategies and a focus on resilience are vital to navigating this uncertain economic landscape.
“UK businesses must rethink their financial frameworks to strengthen stability and resilience. Regular budget reviews, agile supply chains, and strategic bulk purchasing can help offset rising costs, while embracing new technologies and streamlining operations will drive productivity and efficiency gains. Recent data from Manx Financial Group shows nearly a third of UK SMEs have paused or scaled back operations due to financial constraints, an improvement from 40% last year, but still a worrying sign. Access to external funding remains a hurdle for around 10% of SMEs, reinforcing the need for a more inclusive, resilient lending landscape.
“As SMEs power growth, employment, and innovation, the Labour Government must prioritise creating a stable, supportive financing environment. Yet, while its ambition for growth is clear, we’ve seen little progress in translating this into legislation that improves funding access. Slowing GDP growth, rising wage costs, and geopolitical instability are pushing SMEs to cut investment, scale back growth plans, and preserve cash. In this environment, demand is growing for flexible, Sterling-based working capital solutions – hallmarks of alternative lenders – as traditional finance tightens. This is a time for lenders to step up, not step back.”
Neil Wilson, Investor Strategist at Saxo in the UK: “No danger of Keir Starmer calling Bank of England governor Andrew Bailey a ‘major loser’ and pounding the table for rate cuts … just as well for him. The BoE is dithering when the economy is hardly holding. Fiscal tightening of the kind we are going through needs an escape valve, but Bailey and most on the Monetary Policy Committee are still gun-shy after going through double-digit inflation.
“The Bank of England stuck to the script written it by markets and cut rates as expected. Given the soft survey data and the huge macroeconomic uncertainty, this cut was a certainty. The key now is the pace and depth of cuts to come – heading into the meeting this week markets expected three 25bps cuts from four meetings, and for rates to end the cycle about 100bps lower, at about 3.5%.
“But there are a couple of problems with those assumptions. Going at that sort of clip – expecting cuts also in June or September as well as August – will likely require a bigger breakdown in the economic data than we are likely to see in the near term. Tariffs just don’t hit us in the same way. Two, services inflation remains, at 4.7%, stubbornly high and the MPC is not keen to see this reaccelerate by being too quick to cut.
“But services inflation should materially fall in the coming months, which against the kinds of headwinds facing the UK, will allow the Bank to push forward with more rate cuts – perhaps more the market believes (deeper)- just over a longer time frame, ie slower, than maybe the markets expect. Moreover FX moves – a stronger pound – and lower oil prices should be disinflationary.
“My question is why the sluggishness to act? Why, prior to today, should Britain have rates at 4.5%, the same as the US and double the 2.25% in the Euro area, given the risks to growth and the pressure on the economy that is so self-evident? There is no reason to wait, we might as well cut hard and fast closer to where the ECB is. The BoE should be bolder. The ECB has cut multiple times and we should be much lower than we are today.”