The 0.25% Rate Cut Amid Trade Uncertainties
Main interest rate decreased by Bank of England amid concerns of growth slowdown due to potential US tariffs impact.
In a move expected by economists, the Bank of England slashed its main interest rate by 0.25% to 4.25% on Thursday, battling concerns over the potential shock to global growth from the protectionist policies of the Trump administration.
The announcement, delayed by two minutes due to the two-minute silence for Victory in Europe Day, comes before an anticipated trade agreement between the US and the UK, which might alleviate some of the burden of President Donald Trump's sweeping tariffs.
Trump took to his Truth Social platform to announce the imminent deal, stating that it would fortify the relationship between the US and the UK for years to come. Although most tariffs were temporarily paused after market turmoil, including the 10% baseline tariff on UK goods entering the US, the global economy's future remains unpredictable.
"With US trade policy creating a new demand shock, there are hints that the MPC is ready to adopt a more aggressive easing strategy," Edward Allenby, UK economist at Oxford Economics, opined before the decision.
Since August 2024, the MPC has consistently cut interest rates every three months, lowering them from a 16-year high of 5.25%.
Navigating Inflationary Pressures
The Bank of England overlooked near-term inflationary risks in the British economy when deciding to lower interest rates on Thursday, focusing instead on threats to expansion and downward price pressures.
UK inflation currently stands at 2.6%, and it could surpass the bank's target rate of 2% in the coming months due to a series of price increases in April, such as increased domestic energy and water bills.
The imposition of US tariffs on British goods and the potential for a US-China trade war have the potential to restrain economic growth and push oil prices down, thereby easing inflationary pressures.
In contrast to the Bank of England and the European Central Bank, which reduced interest rates last month, the US Federal Reserve opted to keep rates steady on Wednesday as policymakers assess the impact of Trump's tariffs on the US economy before making any changes.
Global inflation rates have dropped significantly compared to levels seen a couple of years ago, partly due to central banks tightening borrowing costs from the near-zero rates seen during the coronavirus pandemic. Prices then shot up as a result of supply chain issues and later due to Russia's invasion of Ukraine, causing energy costs to rise. As inflation rates have declined from record highs, central banks, including the Fed, have begun to reduce interest rates.
While few - if any - economists anticipate rates returning to the incredibly low levels seen following the 2008-2009 global financial crisis and the pandemic, they do expect rates to remain lower than pre-pandemic levels.
Related:
- Upcoming US-UK Trade Deal
- Fed Holds Rates Steady amid Inflation Concerns
Read more:
- Global Economy
- Interest Rates
- Trade Wars
- Economic Growth
- Bank of England
- Amidst the anticipation of a US-UK trade agreement, the Bank of England reduced the primary interest rate via a 0.25% cut, citing concerns over the impact of Trump's protectionist policies on global growth.
- During the Bank of England's rate-cutting decision on Thursday, they overlooked near-term inflationary risks, focusing instead on threats to expansion and downward price pressures.
- In contrast to the Bank of England's easing strategy, the US Federal Reserve opted to maintain rates steady amid inflation concerns, assessing the impact of Trump's tariffs on the US economy before making adjustments.
- Edward Allenby, a UK economist at Oxford Economics, opined before the Bank of England's decision that with US trade policy creating a new demand shock, the Monetary Policy Committee (MPC) might adopt a more aggressive easing strategy.
