The Bank of England has cut its key interest rate by 25 basis points to 4.25%, marking its fourth reduction in less than a year as policymakers respond to sluggish economic growth, cooling inflation, and global trade turbulence triggered by U.S. tariffs.
The Monetary Policy Committee (MPC) was split in its decision: five members voted for the 0.25-point cut, two wanted a deeper reduction to 4.0%, and two preferred to hold rates steady. Governor Andrew Bailey described the outlook as “gradual and careful” and signaled more easing could follow, though without committing to a timetable.
“I’m still of the view that the path, gradually and carefully, is downwards,” Bailey said.
Trade tensions tilt the balance
The latest cut comes in the wake of U.S. President Donald Trump’s aggressive tariff campaign, which has raised concerns about a broader global slowdown. The BoE cited the tariff environment as a factor tipping some members toward rate reductions, with its latest forecasts suggesting the trade war could shave 0.3% off UK GDP over three years.
Though Britain and the U.S. announced a partial tariff deal on Thursday—lowering duties on certain goods—Bailey warned the broader impact of global trade tensions remained a drag on sentiment and investment. “Maybe we need a bit of a jolt to the system to remind us that trade is important,” he said, expressing hope that new agreements with the U.S. and India could help restore a rules-based trading framework.
Inflation outlook revised
The decision to cut rates was supported by falling inflation, which eased to 2.6% in March. However, the Bank expects a temporary spike to 3.5% this year due to regulated hikes in household energy and water bills. It now sees inflation returning to its 2% target by early 2027—nine months sooner than previously forecast.
“Interest rates are not on autopilot,” Bailey stressed. “The MPC must continue to respond carefully to the evolving economic circumstances and the outlook for inflation.”
Markets are now pricing in further cuts, with rates expected to fall below 3.5% by year-end.
Relief for mortgage holders, mixed news for savers
The rate cut is expected to reduce monthly repayments for the roughly 600,000 UK mortgage-holders on tracker loans. UK Finance estimates that a typical customer could save around £29 per month. Fixed mortgage rates have already been edging lower in anticipation of further easing, with average two-year deals sitting at 5.14%.
However, savers may face diminished returns, reversing the improved yields seen over the past two years of elevated rates.
Economic growth modest, fragile
The BoE slightly upgraded its growth outlook for 2025 to 1.0% from 0.75%, citing a strong end to 2024 and resilient early-year data. But it cut its 2026 forecast to 1.25% and now sees quarterly underlying growth running at just 0.1%.
Wage growth is forecast to cool from near 6% to 3.75% by the end of 2025, while unemployment is expected to inch up to 5% next year.
In light of mounting uncertainties—including tariff volatility, inflation risks, and fragile productivity—policymakers have replaced their prior inflation-focused scenarios with broader outlooks encompassing trade disruptions and weak consumer sentiment.
“With so many moving parts in the global and domestic outlook, the Committee may maintain a cautious stance,” said Alpesh Paleja of the Confederation of British Industry. “But with inflation risks increasingly tilting to the downside, a faster pace of rate cuts may become more palatable.”
