The Bank of England has cut its key interest rate by a quarter point to 4.25% amid concerns over US President Donald Trump’s planned tariffs, which threaten to weaken economic growth. This decision follows the Federal Reserve’s move to freeze US borrowing costs and the European Central Bank’s rate cut last month.
According to Bank of England Governor Andrew Bailey, “inflationary pressures have continued to ease, so we’ve been able to cut rates again today. But 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.” Bailey added that the bank’s top priority is ensuring low and stable inflation.¹ ²
The rate cut was widely expected, but the split vote by the Monetary Policy Committee was not. Five members supported the 0.25% reduction, while two wanted a larger 0.5% cut, and two voted to hold rates steady. Enrique Diaz-Alvarez, chief economist at Ebury, noted that “the key to the reaction in the pound will be the bank’s accompanying communications.” He expects the bank to revise lower both its inflation and growth projections for 2025, citing US tariffs as a factor weighing on UK growth and dampening price pressures.
The UK economy is facing significant challenges, including 10% tariffs on most goods exported to the US, its second-largest trading partner after the EU. Bailey has warned that Trump’s trade policies could hurt the UK economy, even if the country avoids the heaviest tariffs. A potential UK-US trade deal, expected to be announced later, may ease some of these concerns.
Impact on Economy and Inflation
The Bank of England has revised its UK growth forecast downward, projecting GDP to expand by 1% in 2025, 1.25% in 2026, and 1.5% in 2027. Inflation is expected to peak at 3.5% this summer before easing to the 2% target by early 2027. Unemployment is forecast to rise to 5% by the end of next year, from 4.4% currently.
With further rate cuts expected, economists predict the interest rate will fall to around 3.75% by the end of 2025. The Bank of England’s cautious approach aims to balance gradual rate cuts with the need to control inflation and support economic growth amidst global trade uncertainty.