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The Bank of England cut interest rates to 4.25%, but estimated it was not in a pre-established pathway to further cuts in preparation for the impact of US President Donald Trump’s trade policy.
The BOE’s Monetary Policy Committee split three ways into decisions ahead of the announcement of the US-UK trade agreement, which it hopes London will limit the tariff hit on UK exports.
While Thursday’s quarterly point cut was expected, MPC’s claims have led traders to trim bets on further interest rate cuts this year to further reduce their “gradual and prudent approach.”
“Interest rates are not autopilots. They can’t,” said BOE Gov. Andrew Bailey.
Traders have priced two more interest rate cuts this year, with the chances of meetings dropping between 80% and about 40%, according to the level implied by the swap market.
“This is a more divided MPC,” says Sanjay Raja, British economist at Deutsche Bank. “The probability of consecutive rate reductions should be reduced to this back.”
A majority of five MPC members supported the quarter point cut, but two supported a larger half-point cut, with two supporting a recruitment fee of just 4.5%.
“Overall, that’s a surprise for the hawk,” ING’s Forex strategist Francesco Pesol emphasizes that BOE chief economist Huw Pill is one of those voting without change.
The pound rose above $1.33 after voting, putting it in the positive territory of the day.
Gold leaf yields over the two years moved backwards to prices, reflecting interest rate expectations, but rose 0.06 percentage points at 3.87%.
The BOE competes with the price and impact of uncertainty created by Prime Minister Rachel Reeves’ £400 billion tax hike announced in the October budget and the impact on economic activity of the uncertainty created by Trump’s tariff plans.
The central bank is also partially driven by the rise in household bills, facing the prospect of rising inflation in the coming months. In a new set of forecasts released Thursday, BOE peaked at 3.5% in the third quarter, returning to its central bank 2% target in 2027.
This week’s meeting was the first since Trump’s global tariff announcement last month, and said the BOE helped to weaken the global growth outlook, but added that “the negative impact on UK growth and inflation is likely to be smaller.”
British officials have suggested that the scope of Thursday’s deal with Washington is limited, potentially focusing primarily on the automotive and steel industries. Bailey said the deal would be “welcome” news. “It helps reduce uncertainty, and that’s important,” he said.
The BOE predicts that fundamental UK GDP growth has slowed since mid-2024, with the economy expanding 1% this year, with 1.25% weaker than expected in 2026.
