Bank of England set to cut interest rates as US tariffs in focus
UK interest rates are set to be cut to 4.25 per cent as the Bank of England eases costs for borrowers while it digests the impact of US tariffs on the economy.
Most economists are expecting rates to be reduced by 0.25 percentage points on Thursday.
Sandra Horsfield, an economist for Investec, said it is a “near-certainty” that borrowing costs will be eased further, with most participants in the financial markets pricing in a cut.
Inflation has fallen in recent months, which is likely to indicate to policymakers that interest rates – which are used as a tool to control inflation – can continue to come down.
Consumer Prices Index (CPI) inflation slowed to 2.6 per cent in March, from 2.8 per cent in February, according to the latest official data.
And importantly, the rate of services inflation – a metric closely watched by the Bank of England – fell to 4.7 per cent from five per cent.
“The new question now though for the MPC (Monetary Policy Committee) to consider is how the US trade policy shifts have changed the outlook for UK inflation,” Horsfield said.
“What makes this month’s decision easy is that virtually everything has pointed in the direction of lower UK inflation pressure.”
Economists have said UK economic growth is likely to be slowed by elevated levels of uncertainty – with some businesses set to pause investments, and consumers to decrease spending.
Others have said countries like China, in the face of higher charges on exports to the US, will re-route trade and lower import prices for other countries, which could result in lower prices for UK consumers.
Combined with other factors, including a weaker US dollar and falling oil prices, this could put downward pressure on inflation, according to economists.
Horsfield said while the MPC continues to work out the possible effects, its “game plan will be to reassure the public and markets that it stands ready to act if needed”.
Edward Allenby, UK economist for Oxford Economics, agreed that “beyond May’s interest rate decision, the more important question is how US tariff announcements are influencing the MPC’s thinking”.
Allenby predicted the MPC could downgrade its near-term growth and inflation forecasts on Thursday.
Thursday’s decision will be the “first opportunity for the MPC to clearly set out how recent developments have shaped its outlook and what committee members will be focusing on ahead of future interest rate decisions”, he said.
Meanwhile, Europe’s central bank cut interest rates last month, and said “exceptional uncertainty” over trade policy meant future rate decisions would have to be taken on a meeting by meeting basis.
By Anna Wise, PA Business Reporter