The Bank of England (BoE) has cut interest rates to 4.25% amid a global trade war and a weak domestic economy, marking its fourth reduction since rates peaked at 5.25% last year.
The monetary policy committee (MPC) voted to cut rates from 4.5% for the first time since US president Donald Trump’s recent “liberation day” tariff announcements, which imposed sweeping levies on UK exports, including a 10% tariff on all goods and a 25% charge on steel, aluminium, and cars.
The BoE governor Andrew Bailey said policymakers needed to stick to a “gradual and careful” approach to cutting interest rates.
Bailey said: “Inflationary pressures have continued to ease so we’ve 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.”
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The Bank’s nine-person MPC voted by a majority of five-four to reduce rates by 0.25 percentage points. Two members of the MPC, Swati Dhingra and Alan Taylor, wanted to push through a bigger 0.5 percentage point reduction to interest rates.
Another two members, Catherine L Mann and Huw Pill, preferred to keep rates unchanged at 4.5%.
Sanjay Raja, chief UK economist at Deutsche Bank, said the BoE's monetary policy committee now looks “more divided”, and is dragging its feet on the speed and scale of rate cuts. He explained: "A three-way split with two members (Dhingra/Taylor) voting for a 50bps rate reduction and two members (Mann/Pill) voting for NO CHANGE to Bank Rate.
"This leans more hawkish than dovish. Put another way, we now have two members who may be thinking that policy could be sufficiently restrictive at these levels. Also it’s worth noting that prior to global trade news, most of the five voters for a quarter point rate cut were debating no change in Bank Rate. Put simply, this is still a very cautious if indeed split MPC."
Bailey said in a press conference that "interest rates are not on autopilot, they cannot be." Instead, he added, the BoE's monetary policy committee will set borrowing costs based on the evolving economic circumstances and the outlook for inflation.
Chancellor Rachel Reeves said: “This interest rate cut is welcome news, and the fourth since we came into government making it cheaper for businesses to borrow, reducing the cost of a new mortgage, making homeownership more accessible, car finance more affordable and easing the pressure on those paying off personal loans.
“But there is more to do, and I know families are still facing cost of living pressures. In a changing world we’re bringing stability to the public finances and going further and faster to grow the economy, putting more money in the pockets of working people through our Plan for Change.”
The decision comes as financial markets increasingly bet on further monetary easing, with pricing indicating that Bank Rate could fall by nearly a full percentage point by the end of the year. That would imply four more quarter-point cuts, a shift from the BoE’s earlier stance of “gradual” policy changes.
Guillermo Felices, global investment strategist at PGIM Fixed Income, said: “On the domestic front, wage growth and services inflation are running lower than the BoE had projected in February. Add to that the deflationary impact of global trade tensions, lower energy prices, and a stronger Sterling, this meeting seems like the perfect time for the MPC to guide away from their “gradual” approach to cuts.
“The front end rates market is almost in line with our view. The market prices in another cut in July and almost two more in H2.”
Markets see recent trade tensions as a game-changer for UK interest rate expectations. “The uncertainty created by the US tariffs will certainly have some dampening effect,” said Will Hobbs, chief investment officer at Barclays Private Bank.
Laith Khalaf, head of investment analysis at AJ Bell, said tariffs had caused a “massive reappraisal of the future path of UK interest rates”.
“As things stand, markets are focusing on the collateral damage to the UK economy rather than the potential for a trade war to ignite inflation once again,” he said.
Economists are also paying close attention to the BoE's forecasts for inflation and economic growth.
UK economic growth is expected to be stronger than previously thought this year, but weaker over 2026 as the impact of tariffs on global trade takes its toll, according to new forecasts from the Bank of England.
The projections show gross domestic product (GDP) will average at 1% this year, marking an upgrade from the 0.75% growth predicted in the Bank’s last report in February.
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This is largely due to growth over the first three months of 2025 being higher than the Bank had previously anticipated.
But the forecast for 2026 has been downgraded to 1.25%, from 1.5% previously.
The BoE also cut its growth outlook for the global economy to 1.5% in 2026, from 2% previously, as new US tariffs and heightened uncertainty over global trade weigh on economic activity around the world.
The BoE said: "Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners. There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower.
"Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller."
The value of the pound jumped after the BoE's policymakers were split three ways in their decision to cut interest rates.
CCY - Delayed Quote • USD As of 9:17:24 PM GMT+1. Market Open.
Lindsay James, investment strategist at Quilter, said: "The UK and global economy remains in a period of hiatus as we await the outcome of a 90 day pause in reciprocal tariffs. With the UK and US expected to announce some sort of trade agreement, any retaliation from UK is now firmly off the cards.
"This removes one risk for the MPC in terms of the effect that would have on prices, however with the universal 10% tariff likely to remain in place for the UK, it could also be a case of damage limitation."
Nicholas Hyett, investment manager at Wealth Club, said: "The government and markets will welcome a little bit of extra padding. Changes to the national living wage and employer national insurance contributions only came into effect in April, and have the potential to spark an uncomfortable combination of rising prices and weaker labour markets.
"So far the economy has dealt with that looming speedbump surprisingly well, but some defensive driving from the Bank is no bad thing in an unpredictable market where key players have been known to suffer from the occasional bit of road rage.”
Headline consumer prices index (CPI) inflation slipped to 2.6% in March from 2.8% in February, while services inflation — a key metric for the BoE — fell to 4.7% from 5%. Analysts interpret this as giving the central bank more room to cut rates without stoking inflation.
The BoE now predicts inflation will peak at 3.5% in the third quarter of this year, having previously forecast it would hit 3.7% in Q3.
The rate cut also coincides with speculation over a potential UK-US trade agreement. Downing Street said prime minister Keir Starmer is expected to provide an update on negotiations later on Thursday. The government has been seeking to mitigate the economic impact of Washington’s protectionist stance.
Bailey welcomed news of a UK and US trade deal, which he said would help to reduce uncertainty.
Although he has not been briefed on the content of any agreement, the BoE governor said such a deal would be “excellent”.
He warned that Britain is a “very open economy” and as a result he hoped any deal announced today would be the first of many, as Britain is “effected by the way tariffs effect other economies”.
Meanwhile, the US Federal Reserve held rates steady on Wednesday in the range of 4.25% to 4.5%, warning that tariffs risk raising prices, slowing growth, and increasing unemployment.
The European Central Bank opted to ease policy last month to 2.25%, while Sweden’s Riksbank and Norway’s Norges Bank held rates steady on Thursday — at 2.25% and 4.5% respectively — citing trade uncertainty and domestic inflation risks.
The rate cut should provide some relief to mortgage holders as lenders are already engaged in a mini price war.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: "The latest interest rate decision will certainly deliver some spring cheer to those households still trying to get budgets back on track following the post-pandemic cost of living and borrowing crises that saw personal finances squeezed to the max.
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“First-time buyers, those with large mortgages that need to be refinanced, and borrowers with heavy debts, are likely to be the most relieved by the potential for easing borrowing costs. Savers, meanwhile, might feel disappointment at the prospect of a lower return on their savings pots.
“With inflation now closer to the BoE’s target of 2%, the worst of the cost of living squeeze appears firmly in the rear-view mirror but living costs remain high and consumers can’t breathe a sigh of relief just yet.
"Inflation is expected to tick back up again in the coming months — up to 3.5% in the third quarter — a result of US president’s tariff war and households being hit by a fresh barrage of bill hikes in ‘Awful April’ when energy, water, council tax and other household costs jumped once again."
The average homeowner on a tracker mortgage will see their monthly repayments fall by nearly £29, after the quarter-point snip to the BoE base rate.
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UK Finance said homeowners on tracker deals will typically see their monthly repayments reduce by £28.97, based on balances outstanding. This could add up to a saving of nearly £350 over the course of a year.
People on a standard variable rate (SVR) mortgage could see their monthly payments fall by £13.87, assuming that their lender passes on the base rate cut in full, which could add up to a saving of nearly £170 over a year.
Mortgage holders may end up on an SVR when their initial deal ends and the rate is set by individual lenders.
Matt Smith, Rightmove's (RMV.L) mortgage expert, said: "Looking ahead, there’s still a lot of uncertainty over how trade tariffs may impact the global economy, so it’s difficult to make predictions right now. However, as it stands, the financial markets are forecasting two-to-three more Bank Rate in 2025, which could take us to a rate of 3.75% by the end of the year.
"In the short-term, I think movers can expect average mortgage rates to trickle downwards over the next few weeks but not dramatically.”
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