Central Bank of England Prepares to Lower Interest Rates Amidst Scrutiny of American Tariffs
UK Interest Rates Likely to Plummet Amid Economic Strife
The Bank of England is set to slash interest rates by a quarter of a percent next Thursday, offering much-needed relief to borrowers amid the turmoil of US tariffs on the economy. Most economists predict this reduction to 4.25%.
Sandra Horsfield, an economist for Investec, remarks that it's almost certain interest rates will drop further, with almost everyone in the financial markets betting on a cut. The dwindling inflation rates signal to policymakers that interest rates, traditionally used to control inflation, can continue to decline.
Inflation has dipped in recent months, with Consumer Prices Index (CPI) inflation slowing to 2.6% in March from 2.8% in February. Interestingly, the rate of services inflation, a metric keenly watched by the Bank of England, has fallen to 4.7% from 5%.
Horsfield poses the question of how US trade policy shifts have altered the outlook for UK inflation. She states that recent developments point towards reduced inflation pressure. Some economists claim that disruptions in US trade could lead to cheaper imports, easing the burden on UK consumers and reducing inflation.
Others suggest that heightened uncertainty might dampen UK economic growth, as some businesses decide to postpone investments, and consumers scale back spending. The extent to which these factors impact inflation remains to be seen, and the Monetary Policy Committee (MPC) continues to ponder this question.
Most economists agree that the MPC will issue a statement reassuring the public and financial markets, pledging readiness to act if needed. Edward Allenby, UK economist for Oxford Economics, emphasizes that beyond the May interest rate decision, the MPC's long-term response to US tariff announcements will be crucial. He predicts the MPC could revise its near-term growth and inflation forecasts in the coming months.
These developments follow the European Central Bank's announcement last month that it would cut interest rates and adopt a meeting-by-meeting approach due to trade policy uncertainty. The consequences of US tariffs on UK economic growth and interest rate policy may reverberate for some time, calling for vigilant monitoring and careful adjustments from policymakers.
By Anna Wise, PA Business Reporter
Enrichment Data:
Overall:
The US tariffs on UK exports pose significant challenges to the UK's economic outlook and interest rate policy. Here's an analysis of their effects:
Impact on UK Economic Growth:
- Direct negative effects:
- Export demand decline: A 10% tariff on UK goods exported to the US reduces competitiveness, negatively affecting sectors reliant on US trade [1][4].
- GDP slowdown: KPMG projects GDP growth could decrease to 0.8% in 2025–2026, due to reduced exports and trade diversion risks [2].
- Business impact: 62% of UK firms with US trade exposure anticipate negative consequences, including higher costs and reduced sales [3].
- Mixed secondary effects:
- Trade diversion: Lower prices from non-US exporters could decrease UK import costs, boosting household real incomes [1][4].
- Exchange rate dynamics: A weaker pound (due to reduced dollar demand) might partly offset export declines by making UK goods cheaper abroad, but import inflation could escalate, squeezing consumer purchasing power [1][4].
Bank of England’s Response:
- MPC priorities: Navigating the growth-inflation balance, contending with tariff-triggered import-led inflation and sluggish growth
- Anticipated rate cuts: Most economists expect a 0.25% rate cut to 4.25% to alleviate borrowing costs amid sluggish growth, as highlighted in recent investigations.
- Cautious adjustments: Fiscal constraints and "sticky" inflation (due to a weakened pound) may limit aggressive easing, leading to a gradualist approach [5].
Policy Outlook:
The BoE is likely to prioritize growth stabilization over near-term inflation risks, given the projected GDP slowdown. However, sustained tariff-related inflation could force a reconsideration of rate cut timelines, particularly if sterling depreciation accelerates.Key takeaway: The MPC's response will hinge on whether tariffs primarily manifest as a demand shock (benefiting from stimulus) or a supply shock (requiring restraint) [5].
- The economic anxiety in the UK is partially attributed to the US tariffs on its exports, creating significant challenges for interest rate policy.
- Most economists anticipate a 0.25% interest rate cut to 4.25%, which the Bank of England is seemingly prepared to implement due to sluggish growth.
- Oxford Economics' Edward Allenby predicts that the Monetary Policy Committee could revise its near-term growth and inflation forecasts in the coming months, reflecting their response to the US tariff announcements.
- The MPC's long-term strategy beyond the May interest rate decision will be critical, as they weigh the potential economic growth benefits against the risks of escalating inflation due to tariffs.
