Bank of England interest rate decision
Newsflash: The Bank of England has cut UK interest rates, by a quarter of one percentage point.
The move, which matches City expectations, lowers Bank rate to 4.25%, its lowest level in around two years.
More to follow…
Key events
Wall Street opens higher on trade optimism
Over in Wall Street, the main share indices have opened higher as Donald Trump’s promise of a trade deal today cheers investors.
The Dow Jones industrial average has risen by 248 points, or 0.6%, in early trading to 41,362.
The S&P 500 index is up 35 points, or 0.6%, to 5,667 points and the tech-focused Nasdaq has gained 0.9%.
Shares in chipmakers are rallying, after the Trump administration confirmed it plans to rescind and modify a Biden-era rule that curbed the export of sophisticated artificial-intelligence chips.
Nvidia are up 0.3%, while Intel have jumped 2.7%.
Pound rises after Bank split over interest rates
The pound has risen against the US dollar since the Bank of England’s interest rate cut was announced.
Traders are surprised that two policymakers opposed today’s rate cut – details here – which may be a sign that the Bank might not cut borrowing costs as much as expected this year.
Before noon, the City had expected four rate cuts this year. Now, only two more are fully priced in – on top of the one just announced.
Sterling is up a third of a cent, at $1.3333.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
“The Bank of England appears thoroughly divided over the path ahead for UK rates, with committee members appearing at odds as to how best to tackle the acute uncertainty created by President Trump’s tariffs. In an attempt to counteract the growth risks posed by the tariffs, and in acknowledgement of progress on disinflation, the majority of the MPC voted for a 25 basis point cut, with two of the doves even favouring a 50bp move.
“Yet, surprisingly, two of the hawks were in favour of no change, with the bank suggesting that the impact of the tariffs on UK growth and inflation would probably be minimal. The MPC also reiterated the line that additional cuts would be both “gradual and careful”, a stance intended to temper expectations for aggressive easing in the coming months.
“The pound has received a modest leg up following the announcement, as markets dial back bets in favour of lower UK rates. We think that a pause is almost guaranteed at the bank’s next meeting in June, with no more than two further cuts likely to follow during the rest of the year. This cautious approach should, we believe, act to keep sterling well bid, particularly given Britain’s relative isolation from the growth risks posed by US protectionism.”
Over in the US, the jobs market continues to remain solid despite the economic damage caused by Donald Trump’s trade war.
The number of new claims for unemployment benefit dropped last week, by 13,000, to 228,000, new data shows.
That indicates that there was not a surge in layoffs in April, after Trump’s “Liberation Day” tariffs spooked the markets.
Neil Birrell, chief investment officer at Premier Miton Investors, says:
“The US jobless claims number came bang on expectations. Despite the stresses and uncertainties overhanging at present, the US labour market is holding up well, backing up the Fed’s decision on rates.
It’s difficult to imagine the jobs market can continue to hold up like this, but the US economy is a resilient one. Every data release is going to be analysed in depth for any sign of weakness.”
Bailey: Need to watch pricing by multinational companies
Q: How concerned are you that large multinational companies might raise prices in the UK, as part of a wider programme of higher prices?
Governor Andrew Bailey says this is an interesting question – and one which the Bank of England needs to “keep a very careful eye on”.
He explains that the Bank’s analysis has distinguished between countries who impose tariffs, and countries who are hit by them, when assessing the impact.
[that’s because tariffs would be expected to be inflationary for the country setting them, and potentially deflationary for thosse on the other end].
But Bailey agrees that the Bank needs to watch carefully for signs that companies decide to impose “pricing solutions right across the world”.
Back at the Bank of England, governor Andrew Bailey has been asked whether the real game-changer for the UK economy would be de-escalation between the US and China, rather than whatever Donald Trump announces this afternoon.
Bailey agrees, saying China is a “very important part” of the trade story. so whatever happens between the US and China will be significant.
He also points to the weak domestic demand within China as an example of imbalances within the global economy.
Today’s three-way split regarding the MPC’s vote on interest rates confirms the difficulty of making predictions about developments in UK inflation and GDP growth, says Professor Costas Milas, of the University of Liverpool’s Management School.
He tells us:
President Trump’s “stop-go” trade policies will definitely harm global growth and UK growth as businesses remain unwilling to invest at least until the tariff-related “fog” clears. This is reflected in the Bank’s latest GDP growth forecasts.
Weak UK growth will, to some extent, reduce the impact of higher tariff rates on UK inflation which, in turn, opens the door for future interest rate cuts as soon as next month (on June 19th). Nevertheless, the very news of a possible trade deal between the UK and the US has the potential of lifting business “spirits” and creating significant momentum in UK growth.
The “downside” of this trade deal news is that the Bank’s new inflation and output projections risk becoming out-of-date immediately! That is, it is very likely that the Bank’s GDP growth rate forecasts of 1.3% for 2025Q2 and 1.5% for 2026Q2 will turn out to be significantly higher!
Bank’s 5-2-2 vote split shows ‘divided’ committee
There’s a lot of chatter in the City about the three-way split at the Bank of England this month – with two policymakers pushing for a larger, half-point cut, and two opposing any cut at all.
Anna Leach, chief economist of the Institute of Directors, said today’s split vote underlines the degree of uncertainty facing policymakers.
Leach explains:
“The MPC voted 5-4 to cut rates today, in a surprisingly close vote by the MPC. Two members voted for a larger 50 basis point cut, but two voted to hold rates.
It is clear from the minutes that the MPC are caught between concern over higher inflation becoming embedded in expectations and downside risks to growth from global developments.
Sanjay Raja, chief UK economist at Deutsche Bank, says the Bank’s monetary policy committee now looks “more divided”, and is dragging its feet on both the speed and scale of rate cuts.
Raja tells clients:
A three-way split with two members (Dhingra/Taylor) voting for a 50bps rate reduction and two members (Mann/Pill) voting for NO CHANGE to Bank Rate. This leans more hawkish than dovish.
Put another way, we now have two members who may be thinking that policy could be sufficiently restrictive at these levels. Also it’s worth noting that prior to global trade news, most of the five voters for a quarter point rate cut were debating no change in Bank Rate. Put simply, this is still a very cautious if indeed split MPC.
Raja also flags that the Bank’s forecasts show UK GDP was revised up in 2025 (1%), revised down in 2026 (1.25%), and lowered in 2027 (1.25%), adding:
Unemployment is expected to peak higher (5%) and get there faster – another dovish tilt to the projections. Wages (private sector regular pay) were revised down to 2.75% in Q4-26 and Q4-27 – again moving in a dovish direction.
Today’s cut to interest rates should help borrowers such as mortgage-holders, assuming lenders pass it on.
But it is less cheering for savers, who could see lower savings rates.
Bailey: Excellent news that UK is leading the way on US trade deal
Bank of England governor Andrew Bailey has hailed the news that Britain and the United States are expected to announce a trade agreement in a couple of hours.
He tells journalists at today’s press conference that the Bank has been following the issue very closely.
Bailey says he hasn’t been briefed about the situation, and doesn’t know the content of the deal.
But he says:
We do now have news that suggests there will be an announcement, and we welcome that news.
I very much welcome it, and I think it’s very well done to those involved.
Bailey explains that the deal will help to reduce uncertainty within the economy.
But, he cautions, as the UK is a very open economy, so will be affected by the way tariffs affect other economies.
Bailey says:
I hope that the UK agreement, if it is indeed announced this afternoon, will be the first of many.
That will be good news all around, including for the UK economy.
It is “excellent that the UK is leading the way”, he concludes, repeating his congratulation to those involved on both sides.
Reminder: Donald Trump has already announced a trade deal between the UK and the US, saying the agreement is a “full and comprehensive one”.
Bailey: Interest rates are not on autopilot
Bank of England governor Andrew Bailey is speaking to journalists in London now, to explain why the BoE lowered interest rates to 4.25%.
Bailey starts by declaring:
The disinflation process in the UK economy has continued.
He explains that at 2.6% in March, inflation was lower than expected, meaning the Bank could take “another step” to making monetary policy less restrictive.
Bailey says the past few weeks have demonstrated that the global economic environment is uncertain.
Interest rates are not on autopilot, they cannot be.
Instead, he says, the Bank’s monetary policy committee will set borrowing costs based on the evolving economic circumstances and the outlook for inflation.
Bank lowers inflation forecast, a little
The Bank of England has trimmed its forecast for inflation this year.
The BoE now predicts inflation will peak at 3.5% in the third quarter of this year, having previously forecast it would hit 3.7% in Q3.
That’s good news, on balance, for households, but it still means inflation is going to rise further above the Bank’s 2% target – having been 2.6% in March.
The Bank of England has drawn up two scenarios for how the UK economy could develop in the face of global uncertainty, due to the US trade war.
In the first scenario, UK demand is weaker and domestic inflationary pressures fade more quickly than in the Bank’s baseline projections, driven by elevated uncertainty.
The BoE says:
In the first scenario, greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically, might further mitigate inflationary pressures over the medium term.
Underlying GDP growth had been weak, and global trade policy uncertainty had risen sharply, which was likely to weigh on household consumption and business investment. It was possible in this environment of uncertainty that precautionary saving could rise and consumption could weaken.
But in a second scenario considered by the Bank, inflation remains persistent for longer, due to wages and prices rising faster than expected.
The BoE explains:
In the second scenario, greater persistence in domestic wage- and price-setting, both from additional second-round effects related to the near-term increase in headline CPI inflation and from weaker aggregate supply, might exacerbate the persistence of inflation.
Underlying services consumer price inflation and indicators of wage growth had been moderating, but remained at elevated levels. There was evidence that the near-term inflation expectations of firms and households had recently become more reactive to changes in current CPI inflation than they had been pre-Covid. In addition, there were upside risks to inflation stemming from softer growth in potential productivity.
Prospects for global growth have weakened due to trade uncertainty
Announcing today’s decision to cut interest rates, the Bank of England warns that the trade war triggered by Donald Trump risks damaging global growth.
The BoE says:
Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners. There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower.
Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller.
