Bank of England cuts interest rate as US tariffs hit economy

A picture shows the Bank of England, Britain’s central Bank, in London on June 20, 2024. (Photo by Ben Stansall / AFP)

LONDON, United Kingdom — The Bank of England on Thursday cut its key interest rate by a quarter point to 4.25 percent as the threat of US tariffs starts to weigh on economic growth.

The central bank’s fourth such reduction in nine months, which had been widely expected by markets, contrasts with a decision by the US Federal Reserve on Wednesday to freeze borrowing costs.

The Bank of England update meanwhile came shortly after Donald Trump announced an agreement with Britain on trade, the first such deal since the US president launched his global tariffs blitz.

“This will be good news all round, including for the UK economy,” BoE governor Andrew Bailey told a press conference following the rate decision.

“It will help to reduce uncertainty,” he added.

Following a regular meeting in London, the BoE noted that “prospects for global growth have weakened as a result of… tariff announcements”.

Nevertheless the BoE hiked its forecast for annual UK gross domestic product growth this year, to 1 percent from 0.75 percent.

It said British economic output was predicted to reach 1.25 percent next year, down from the central bank’s previous estimate of 1.5 percent given in February.

READ: UK economy slightly stronger than expected in 2024

Easing inflation

“Trade-related developments in financial markets have generally pushed down on growth,” the BoE added Thursday.

Britain is facing 10-percent tariffs on most of its goods exported to the United States, its second-largest trading partner after the European Union.

Bailey said that easing inflationary pressures, helped by tumbling oil prices in the wake of Trump’s tariffs, had contributed to the bank’s decision to cut.

“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,” he noted.

With the latest rate cut priced in by markets, investors were looking for any shift in language by the BoE’s Monetary Policy Committee that hinted at further reductions this year.

Minutes of the meeting “underscore the continued cautious approach to cutting interest rates favored by MPC members”, noted Yael Selfin, chief economist at KPMG UK.

Analysts said they expected the BoE to maintain its current pace of easing, which has seen a quarter-point cut every three months since August.

The Bank of England’s latest rate announcement occurred at 11:02 GMT, two minutes later than usual as the UK stood silent to mark the 80th anniversary of Victory in Europe Day.

Also Thursday, the central banks of Norway and Sweden kept their key interest rates unchanged while signaling future cuts were possible amid economic uncertainty.

The European Central Bank cut eurozone borrowing costs last month.