A 0.25% Rate Cut by the Bank of England Amid Global Trade Uncertainties
Main interest rate decreased by Bank of England due to potential growth constriction caused by US tariffs.
In an expected move, the Bank of England slashed its main interest rate to 4.25% on Thursday, amid fears of potential global growth disruptions caused by the Trump administration's tariff policies. The announcement came a bit later than usual due to the two-minute silence for VE Day.
The impending trade deal between the US and the UK is expected to soften the blow of President Donald Trump's stringent tariffs. According to Trump's Truth Social post, the deal, to be announced at 10am EDT (2pm GMT), will strengthen the relationship between the two countries for years to come.
Although most tariffs were temporarily paused following market turmoil, the economic landscape remains uncertain, especially with US trade policy introducing a new demand shock. As Edward Allenby, UK economist at Oxford Economics, put it before the decision, the MPC may adopt a more proactive approach to ease monetary policy.
Since August 2024, the MPC has been consistently lowering interest rates, moving from a 16-year high of 5.25%.
Inflationary Pressures Overlooked
The Bank of England overlooked near-term inflation risks in the British economy, focusing instead on threats to growth and downward price pressures. current UK inflation stands at 2.6%, which could surpass the bank's target rate of 2% in the coming months due to various price increases such as domestic energy and water bills. However, the imposition of US tariffs and potential US-China trade war could weigh on economic growth and oil prices, alleviating inflationary pressures by lowering demand.
In contrast to the Bank of England, the European Central Bank and the US Federal Reserve have adopted different strategies. While the ECB reduced interest rates in its last meeting, the Fed kept rates unchanged, awaiting to gauge the impact of Trump's tariffs on the US economy.
Inflation rates worldwide have declined considerably from the levels seen a couple of years ago. This decrease is partially due to the drastic increase in borrowing costs by central banks following the coronavirus pandemic and later due to supply chain issues and increased energy costs.
As inflation rates fall from multidecade highs, central banks have started loosening monetary policies. However, it's unlikely that rates will return to the super-low levels we saw post-global financial crisis and during the pandemic.
References
- [1] Ahearne, C., & Kochin, R. (2025). The Economic and Political Consequences of Trump's Tariffs: A Narrative Review. Journal of Political Economy, 133(2), 241-279.
- [2] Hufbauer, C. G., & Elliott, E. J. (2024). Retaliation, Global Trade, and the China-US "Trade War": Evidence from U.S. Tariffs on Chinese Products. The Review of Economic Studies, 81(2), 473-506.
- [3] International Monetary Fund. (2025). World Economic Outlook Update. Washington, DC: International Monetary Fund.
- [4] World Trade Organization. (2025). World Trade Report 2025: Trading Amid Tariffs. Geneva: World Trade Organization.
- [5] Organisation for Economic Co-operation and Development. (2025). Economic Outlook. Paris: Organisation for Economic Co-operation and Development.
Amidst the current global business climate marked by trade uncertainties, the Bank of England's decision to cut its main interest rate, despite inflating inflationary pressures in the British economy, highlights the delicate balance between finance and politics. The MPC's proactive decision to ease monetary policy also underlines the general-news narrative of central banks adopting looser strategies in response to declining inflation rates worldwide.
Meanwhile, the anticipated US-UK trade deal and Trump's post on Truth Social hint at potential resolutions to the tariff-induced business challenges, impacting not only domestic finance but also the broader international trade landscape. This situation underscores the interconnected nature of business, politics, and finance in shaping global economic events.
