On May 8, 2025, the Bank of England’s Monetary Policy Committee (MPC) voted 5–4 to cut its benchmark interest rate by 25 basis points, lowering it from 4.50 percent to 4.25 percent. This decision—its fourth reduction since August 2023 and second in 2025—reflects the Bank’s response to escalating global trade tensions, particularly the tariffs announced by U.S. President Donald Trump on April 2. Governor Andrew Bailey stressed that the move was “finely balanced” and underscored the need for a “gradual and careful” approach to any further easing, as the MPC navigates the twin challenges of slowing growth and elevated domestic inflation pressures Financial Times.

An Unusual Three‑Way Split on the MPC

The internal debate was notably complex. Five members supported the 25 basis‑point cut; two—Swati Dhingra and Alan Taylor—advocated an even larger 50 basis‑point reduction; and two—Chief Economist Huw Pill and external member Catherine Mann—preferred to hold rates steady at 4.50 percent. Such a three‑way split is rare in the MPC’s recent history, illustrating deep uncertainty over the outlook for wages, inflation and economic growth. Dhingra and Taylor argued that a more aggressive cut was needed to ward off recessionary risks, while Pill and Mann warned that high wage growth—still running close to 6 percent—could keep inflation above target if policy eased too rapidly Reuters.

Tariffs as a Drag on Growth and Inflation

In its policy statement, the BoE quantified the expected impact of U.S. and retaliatory tariffs. Based on data through April 29, the Bank estimates that these trade measures will shave about 0.3 percent off U.K. GDP over three years and reduce inflation by roughly 0.2 percentage points within two years. While a forthcoming U.K.–U.S. trade deal is expected to roll back some levies—such as the 25 percent steel tariffs and 27.5 percent on cars—Governor Bailey warned that around two‑thirds of the projected drag stems from indirect effects on global trade volumes rather than direct U.K. tariffs Reuters.

“No Autopilot” for Future Policy Moves

Bailey repeatedly emphasized that the MPC had no predetermined path for interest rates. He cautioned markets against assuming an “autopilot” sequence of cuts, noting that “the past few weeks have shown how unpredictable the global economy can be.” The MPC retained its mantra of a “gradual and careful” pace for future easing, signaling that each meeting will hinge on fresh data, particularly on inflation, wage growth and external trade developments Reuters.

Market Reaction: Sterling and Gilts

In the immediate aftermath, the pound sterling gained about 0.2 percent against the U.S. dollar, while two‑year gilt yields jumped roughly 7 basis points to 3.93 percent, reflecting tempered expectations for further near‑term cuts. Money‑market futures traders slashed the probability of a June rate cut from over 60 percent before the announcement to under 20 percent afterward, effectively pushing the next likely easing into August pending more conclusive data Reuters.

Borrowers Reap Early Benefits

Mortgage lenders were quick to pass on the Bank’s rate cut. Barclays cut selected two‑ and five‑year fixed‑rate deals by up to 20 basis points, offering a two‑year fix at 3.99 percent for borrowers with 40 percent deposits. Nationwide introduced a two‑year deal at 3.84 percent, its lowest since 2024. Industry estimates suggest that average mortgage holders on variable or tracker rates could save nearly £360 annually, easing household budgets squeezed by rising living costs The Scottish Sun.

Savers Face a Squeeze

Conversely, depositors and savers continue to feel the pinch. Easy‑access savings rates have tumbled below 2 percent, well beneath current CPI inflation of 2.6 percent. Financial advisers recommend that savers shop around or consider higher‑risk alternatives—such as peer‑to‑peer lending or corporate bonds—to protect real returns, though these options carry greater credit and liquidity risks .

Taming Inflation: Revised Projections

In its May Quarterly Monetary Policy Report, the BoE trimmed its forecast for peak inflation in 2025 to around 3.5 percent—down from a previous 3.75 percent—citing lower wholesale energy costs and easing supply‑chain disruptions. However, regulated utility and water bill hikes have kept headline inflation above the 2 percent target, with the Bank now projecting a return to 2 percent by Q1 2027—nine months earlier than its February outlook Financial Times.

Growth Outlook: Modest but Fragile

The BoE upgraded its GDP growth forecast for 2025 to 1 percent—up from 0.75 percent in February—driven by a strong Q4 2024 expansion and resilient early‑year activity. Yet, the Bank cautioned that the Q1 bounce was “erratic,” trimming its 2026 growth projection to 1.25 percent from 1.5 percent. Underlying quarterly expansion has slowed to just 0.1 percent, highlighting the fragility of the recovery in the face of global trade headwinds and elevated borrowing costs Financial Times.

Sectoral Impacts: Manufacturing and Services

Manufacturers reported their steepest export contraction in nearly five years as U.S. and EU tariffs weighed on orders, according to S&P Global. Input‑cost pressures from higher energy and wage bills forced some firms to absorb margins, dampening capital‑spending plans. Meanwhile, the services sector—accounting for over 75 percent of GDP—slid back into contraction in April, with the S&P Global Services PMI falling to 49.0 as new orders weakened. Firms cited uncertainty over trade and geopolitical tensions, even as they raised output prices at the fastest pace in almost two years .

Labour Market: Cooling Yet Tight

Despite slowing growth, the U.K. labour market remains tight, with unemployment around 4.8 percent and annual pay growth near 6 percent. The BoE expects wage growth to decelerate to 3.75 percent by year‑end as weaker demand curbs hiring, but retained caution that persistent pay pressures could keep core inflation above target if policy eases too swiftly Financial Times.

Global Policy Divergence: Fed Holds, ECB Eases

Across the Atlantic, the U.S. Federal Reserve opted to hold rates steady at 5.00 percent for the third consecutive meeting, citing similar trade‑policy uncertainties and mixed growth signals. Chair Jerome Powell emphasized the Fed’s “data‑dependent” approach amid elevated risks of inflation and unemployment, reflecting a stance more cautious than peers Financial Times.

In contrast, Europe’s central banks continue to loosen policy. On the same day as the BoE vote, the European Central Bank signaled further rate cuts after its own deposit rate fell to 2.25 percent, and both Norway’s Norges Bank and Sweden’s Riksbank hinted at easing to offset trade‑driven growth slowdowns. The divergence underscores differing regional inflation dynamics and growth outlooks Reuters.

Looking Ahead: Data‑Dependent and Cautious

With the next MPC meeting slated for late July, the BoE will monitor incoming data on core inflation, pay settlements, consumer spending and global trade developments. Markets still anticipate multiple rate cuts—potentially bringing the headline rate down near 3.5 percent by year‑end—but the Bank’s emphasis on a “gradual and careful” policy path suggests any further easing will be contingent on clear signs that inflationary pressures are abating sustainably Financial Times.

Conclusion

The Bank of England’s rate cut to 4.25 percent marks a critical juncture in its policymaking. In weighing the inflationary risks of persistent wage growth against the economic drag from global tariffs, the MPC confirmed its willingness to support growth—but only thoughtfully. For borrowers, the decision eases financing costs, while savers face further challenges. As the BoE navigates a fractured policymaking environment—both within its own ranks and across global central banks—the road ahead will hinge on fresh economic data and the unpredictable evolution of trade tensions. In this era of “gradual and careful” adjustments, the MPC’s next moves will be as much about timing and nuance as about direction.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

9th May, 2025