Bank of England sticks to cautious path despite trade turmoil

(Bloomberg) — The Bank of England cut interest rates by a quarter percentage point in a divided decision that surprised markets and suggested that the growth risks posed by US President Donald Trump’s global trade war haven’t derailed its plan to ease policy only cautiously.

Five members of the BOE’s Monetary Policy Committee voted for the move, while two wanted a larger half-point reduction and another two voted to hold rates steady. The committee held to its guidance that easing should continue to be “gradual and careful” in light of volatility in the global economy caused by Trump’s sweeping tariffs.

“Inflationary pressures have continued to ease so we’ve been able to cut rates again today,” Governor Andrew Bailey said in a statement accompanying the decision. “The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach.”

The decision showed a more careful tack toward cutting rates than traders had anticipated. The pound gained, hitting a session high versus the euro. Swaps traders dialed back the odds of a reduction in June to around 20% from about 50% beforehand and were divided on whether the bank will cut two or three more times this year. Gilts reverse earlier gains, with 10-year yields rising three points to 4.49%.

This is “clearly a hawkish cut,” said Neil Jones managing director at TJM Europe, pointing to the three-way vote split. 

The BOE’s rate-setters typically vote on the day before the decision is announced. Hours after their meeting on Wednesday, Trump said the US was close to revealing a trade agreement with a major country, which was later reported to be the UK, though the details have yet to be released. 

The BOE made clear that main threat to the UK is from the global impact of US tariffs on Britain’s open economy. The BOE said the hit to activity due to higher costs and greater uncertainty would knock 0.3 percentage points off UK output over three years and lower inflation by 0.2 percentage points over two years.

In his press conference after the announcement, Bailey said he welcomed the reported trade deal and hopes the US will reach agreements with other countries, which could ease some of the risk to growth. 

“It will help to reduce uncertainty, and that’s important,” he said.

Since the BOE’s last policy decision in March, Trump has imposed blanket 10% global tariffs on goods, 25% duties on cars, steel and aluminum, and has effectively embargoed Chinese products with 145% levies. Beijing struck back with 125% levies of its own. The BOE assumed those policies remain in place.

The three-way split on the Monetary Policy Committee underscored the confusion sown by the the US trade plans. External members Swati Dhingra and Alan Taylor voted for a half-point cut, arguing that “global developments in energy and trade policy pointed to potential downward risks to global growth and world export prices.”

BOE Chief Economist Huw Pill and external member Catherine Mann preferred to hold rates, which they said partly reflected the recent easing in financial conditions that has lowered market borrowing costs by 40 basis points since March. They are also more concerned about inflationary persistence due to structural supply side problems in the UK.

The BOE gave itself room to shift gears as needed, with the committee saying it “will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks.”

The decision came a day after the Federal Reserve held US rates in a range of 4.25% to 4.5%, with Chair Jerome Powell – who has been frequently attacked by Trump — making clear the central bank won’t be rushed into easing until there is more certainty on the direction of trade policy.

Even after the rate cuts, monetary policy is still bearing down on growth and inflation, the bank said. While the risk to growth is “somewhat to the downside,” the risks to inflation remain “two-sided,” it added. As a result, the committee will “remain sensitive to heightened unpredictability.”

The BOE also produced two scenarios to help calibrate decision making. The first assumes elevated uncertainty caused by chaotic trade policy hits activity and lowers inflation. The second models weak growth but higher inflation, due supply chain shocks. 

The BOE upgraded growth this year to 1% from 0.7% and lowered next year to 1.25% from 1.5%. The 2027 outlook is unchanged. It struck a note of caution about the sharp 0.6% increase in growth in the first quarter, which was largely accounted for by “erratic factors” as sales of good were brought forward to avoid tariffs. The BOE estimates that the underlying rate of growth in the first quarter was “around zero.”

The bank did not update its assumptions of how the £26 billion increase in employers’ national insurance contributions will feed through to jobs, prices and profit margins. The BOE sees unemployment slightly higher this year and next at 5%, up from 4.75%, and for wage growth to continue slowing to 3.75% by the end of this year, which would be roughly consistent with inflation at the 2% target.

–With assistance from Greg Ritchie and Andrew Atkinson.

(Updates to add comments in eighth, ninth pararaphs.)

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