U.K.'s Bank of England Prepared to Lower Interest Rates amid Focal Point on U.S. Tariffs
UK's interest rates might drop to a staggering 4.25% as the Bank of England takes steps to ease borrowing costs in the face of US tariffs' impact on the economy, according to most economists.
Experts predict a 0.25 percentage point reduction in interest rates on Thursday. Sandra Horsfield, an economist for Investec, believes it's nearly certain that borrowing costs will decrease further, with the majority of financial market participants anticipating a cut.
Inflation has been on a decline in recent months, signaling to policymakers that interest rates, a tool used to control inflation, can continue to drop. The Consumer Prices Index (CPI) inflation slowed to 2.6% in March, from 2.8% in February, as per the latest official data. More importantly, the rate of services inflation, closely watched by the Bank of England, dropped to 4.7% from 5%.
Horsfield mentioned that the focus of the Monetary Policy Committee (MPC) should now be on how US trade policy shifts have affected the outlook for UK inflation. With everything pointing towards lower UK inflation pressure, the MPC is likely to reassure the public and markets that it's ready to act if needed.
Economists say that the UK's economic growth will likely slow due to elevated levels of uncertainty, causing some businesses to pause investments and consumers to decrease spending. Trade partners like China, faced with higher charges on exports to the US, may re-route trade and lower import prices for other countries, which could lead to lower prices for UK consumers. Additionally, factors including a weaker US dollar and falling oil prices could also put downward pressure on inflation.
Edward Allenby, UK economist for Oxford Economics, believes that the MPC's thinking will be significantly influenced by Trump's tariff announcements beyond May's interest rate decision. Allenby foresees the MPC downgrading its near-term growth and inflation forecasts on Thursday, setting the stage for future deliberations on interest rate changes.
With European central banks having cut interest rates last month and citing exceptional uncertainty over trade policy, the MPC's forthcoming decisions will largely depend on the evolving trade situation. By Anna Wise, PA Business Reporter.
Enrichment Data: The recent developments in US tariffs and trade policy have substantially affected UK monetary policy, causing economists to adjust their interest rate projections. There is now a strong expectation for the Bank of England to lower interest rates multiple times this year. The potential for stagflation, characterized by sluggish economic growth and inflation pressure, has increased due to Trump’s tariffs and retaliatory trade measures. Analysts expect the BoE to prioritize domestic growth support over managing import-driven inflation risks in the near term. However, a rebound in inflation is projected towards the end of 2025, posing a challenge for the BoE as it juggles its monetary policy objectives.
- The Bank of England is expected to lower interest rates on Thursday, following the impact of US tariffs on the economy, as many economists predict a 0.25 percentage point reduction.
- In light of US trade policy shifts, Sandra Horsfield, an economist for Investec, suggests that the Monetary Policy Committee (MPC) should focus on the impact on the outlook for UK inflation.
- With the Consumer Prices Index (CPI) inflation slowing and services inflation dropping, the MPC is anticipated to reassure the public and markets that it is ready to act if needed, indicating a potential for further interest rate cuts.
- Edward Allenby, UK economist for Oxford Economics, foresees the MPC downgrading its near-term growth and inflation forecasts, possibly setting the stage for future deliberations on multiple interest rate changes this year.
