Bank of England policymakers have cut interest rates by a quarter point to 4.25% to cushion the UK economy against the impact of rising economic uncertainty.
The widely expected move from the Bank’s monetary policy committee (MPC), its fourth cut since last August, also carried a warning that the UK economy would slow by a further 0.3% over the next three years in addition to dramatic cuts to its forecasts made earlier this year.
In a blow to the chancellor, Rachel Reeves, the MPC said a combination of uncertainty surrounding the impact of US trade policy on the global economy and clouds hanging over the outlook for the UK meant growth would be almost stagnant for the rest of the year.
Making its announcement ahead of a trade deal between Keir Starmer and Donald Trump, the Bank said economic growth “is judged to have slowed and is expected to remain subdued in the near term”.
In a split vote, with two of the nine-member MPC voting for a bigger 0.5 percentage point cut and two voting to hold at the current 4.5% level, the Bank signalled a high degree of caution about the number of interest rate cuts over the rest of the year.
Financial markets expect at least two further quarter-point cuts in borrowing costs this year.
However, concern that inflation will persist above a 2% target into 2026 led the National Institute of Economic and Social Research to forecast this week that the Bank would be limited to just one more cut in 2025.
The Bank’s governor, Andrew Bailey, said: “Inflationary pressures have continued to ease so we have been able to cut rates again today. 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 to further rate cuts. Ensuring low and stable inflation is our top priority.”
The Bank said its latest quarterly forecasts were based on the current tariff situation and did not take account of the proposed deal between government ministers and the White House, which was confirmed hours later.
Details of the deal showed the UK had reduced a 27.5% charge on exports of cars and a 25% one on steel and aluminium, in exchange for concessions in some sectors including agriculture.
However, the chancellor has made clear that regardless of any carve-out, the country will still be affected by the global slowdown expected to result from the trade war.
Bailey said he welcomed the prospect of a deal, describing it as “good news all around, including for the UK economy”.
He added that it was “excellent that the UK is leading the way”, before offering his congratulations to those involved on both sides.
As well as monitoring the impact of trade policy, the Bank’s ratesetters said Reeves’s £25bn increase in employer national insurance contributions, which came into force last month, would affect employment, wages and prices, though it remained unclear to what extent.
MPC members were more concerned that a spike in inflation this year, largely due to higher council tax and utility bills, would provoke a disproportionate response from consumers already battered by a long period of rising prices.
Inflation is expected to peak in the third quarter at an average 3.5%, down from previous forecasts of 3.7%, in part due to cheaper goods being redirected to the UK from China and other countries hit by US tariffs.
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“World export prices are expected to be materially weaker, particularly in China,” the Bank said, adding: “The current overall impact of trade developments on the UK is therefore likely to be disinflationary than inflationary.”
Lower gas and oil prices would also lower inflation this year compared with a forecast in February, it said.
Despite the lower peak in inflation, households could fear a more persistent rise in prices and focus their spending on essential items, limiting the amount of disposable income spent on big-ticket goods, depressing the economy further.
Inflation is not expected to ease to the MPC’s 2% target until spring 2027.
The Trades Union Congress (TUC) said projections by the Bank of lower economic growth and higher unemployment meant it should cut interest rates more aggressively.
The TUC general secretary, Paul Nowak, said: “Lower borrowing costs will ease pressures on households, helping families with their weekly budgets and leaving them with more to spend. And it will make it more affordable for businesses to invest and grow.”
The Bank’s outlook comes after a run of downbeat data on the UK economy, with surveys suggesting consumer and business confidence is weakening.
The Bank said the result would be “subdued” growth in business investment, which is likely to put a brake on hoped-for increases in the UK’s productivity.
Goldman Sachs said the Bank was much more reticent to cut rates than expected. The investment bank had predicted an 8:1 split on the MPC in favour of rates cuts and a signal of several more to support the ailing economy.
