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The Bank of England has cut interest rates by a quarter point to 4.25 per cent but stressed it was not on a preset path to further reductions, as it prepares for the impact of US President Donald Trump’s trade policy.
The BoE’s Monetary Policy Committee was split three ways over the decision, which comes ahead of the announcement of a US-UK trade deal that London hopes will limit the tariff hit on British exports.
While Thursday’s quarter-point cut had been expected, the MPC’s insistence that it would retain “a gradual and careful approach” to further rate reductions prompted traders to trim their bets on further rate cuts this year.
“Interest rates are not on autopilot — they cannot be,” said Andrew Bailey, the BoE governor.
Traders are now pricing in two further rate cuts this year, with a roughly 40 per cent chance of a third — down from 80 per cent before the meeting according to levels implied by swaps markets.
“This is a more divided MPC,” said Sanjay Raja, chief UK economist at Deutsche Bank. “The probability of sequential back-to-back rate cuts should drop on the back of this.”
Although a majority of five MPC members supported the quarter-point cut, two favoured a bigger, half-point reduction and two wanted rates to stay at 4.5 per cent.
“Overall, it’s a hawkish surprise,” said Francesco Pesole, an FX strategist at ING, highlighting that BoE chief economist Huw Pill was among those voting for no change.
The pound rose above $1.33 after the vote, putting it in positive territory for the day.
The yield on two-year gilt, which moves inversely to price and reflects interest rate expectations, was up 0.06 percentage points at 3.87 per cent.
The BoE has been contending with the impact on prices and economic activity of the £40bn of tax increases chancellor Rachel Reeves announced in October’s Budget, as well as the uncertainty produced by Trump’s tariff plans.
The central bank also faces the prospect of inflation rising in coming months, partly driven by an increase in household bills. In a new set of forecasts released on Thursday, the BoE forecast inflation would peak at 3.5 per cent in the third quarter before returning to the central bank’s 2 per cent target in 2027.
This week’s meeting was the first since Trump’s announcement last month of global tariffs, which the BoE said had helped weaken prospects for global growth — although it added that “the negative impacts on UK growth and inflation are likely to be smaller”.
UK officials suggest that Thursday’s deal with Washington may be limited in scope and largely focused on the car and steel industries. Bailey said a deal would be “welcome” news. “It will help to reduce uncertainty, and that’s important,” he said.
The BoE said underlying UK GDP growth had slowed since mid-2024, forecasting that the economy will expand by 1 per cent this year and a weaker than expected 1.25 per cent in 2026.
