Bank of England cuts interest rate by 25 bps amid global trade uncertainty

The Bank of England has cut its main interest rate by 0.25 percentage points to 4.25%, citing concerns over the potential global economic slowdown driven by the trade policies of the Trump administration.

The decision announced on Thursday, comes just hours before a widely anticipated US-UK trade deal is expected to be unveiled. President Donald Trump described the upcoming agreement on his Truth Social platform as a “full and comprehensive” deal that will “cement the relationship between the United States and the United Kingdom for many years to come.”

The move by the UK's central bank underscores growing fears that escalating tariffs—particularly between the US and key trading partners like China and the UK—could derail global growth. Economists believe that despite current inflationary pressures in Britain, the Monetary Policy Committee (MPC) opted for a pre-emptive rate cut to cushion against a potential external demand shock.

“This rate cut reflects early signs that the MPC is willing to adopt a more proactive approach to loosening policy in light of US trade policy shocks,” Edward Allenby, UK economist at Oxford Economics told news agency AP.

The MPC’s decision was revealed at 12:02 p.m., two minutes later than usual in observance of the Victory in Europe Day silence. It marks the latest in a series of quarterly rate cuts since August 2024, when the Bank began reducing borrowing costs from a 16-year high of 5.25%.

Markets and analysts were closely watching the Bank’s updated economic forecasts, which are the first since Trump’s early April tariff announcement. While many tariffs were paused for a 90-day period following market volatility, the economic outlook remains clouded by uncertainty.

Although UK inflation currently sits at 2.6% and could temporarily rise further due to a raft of price increases in April—particularly in energy and water bills—analysts believe the Bank prioritized shielding the economy from the broader impact of trade tensions and falling demand.

In contrast, the US Federal Reserve held rates steady on Wednesday, choosing to wait for more clarity on how US tariffs will influence domestic economic conditions. The European Central Bank also cut rates last month, aligning with the Bank of England’s more dovish stance.

Central banks globally have shifted gears as inflation retreats from multidecade highs seen in recent years, a period marked by aggressive rate hikes to combat pandemic-related supply shocks and energy price spikes following Russia’s invasion of Ukraine.

While further cuts are expected, economists largely agree that interest rates are unlikely to return to the ultra-low levels that characterized the post-2008 financial crisis and the pandemic era.