The Bank of England is expected to cut interest rates by 25 basis points, marking the first assessment of the toxicity of Trump’s tariffs.

Source: Jin10

The Bank of England will announce its decision at 19:02 Beijing time on Thursday, two minutes later than usual, to commemorate the 80th anniversary of Victory in Europe Day. The central bank is expected to cut interest rates by 25 basis points and may hint at further cuts in June. This could mark the first consecutive rate cuts since 2009, as the U.S. trade conflict casts a shadow over economic growth prospects.

A survey of 32 economists by Bloomberg shows that the monetary policy committee is expected to lower the benchmark interest rate from 4.5% to 4.25%, with 20 of them believing that at least one committee member supports a 50 basis point cut. The futures market has also almost fully priced in a 25 basis point cut this time and considers the probability of another rate cut next month to be high.

Since August last year, the Bank of England has cut interest rates three times and paused action in February this year. However, due to the high reciprocal tariffs announced by U.S. President Trump that may drag down the global economy, traders expect the Bank of England to lower the interest rate to 3.5% by the end of the year.

Voting Discrepancies

The decision to lower interest rates is expected to pass unanimously, with only three surveyed economists believing that some members will support keeping rates unchanged. This indicates that a dovish tendency within the central bank has gradually formed, with some members advocating for more aggressive easing to mitigate growth risks.

Among them, the most dovish members, Swati Dhingra and Alan Taylor, hold this position. However, Catherine Mann unexpectedly supported a 50 basis point rate cut in February and then shifted to the majority's wait-and-see approach in March.

Another key figure is Deputy Governor Dave Ramsden, whose voting tendency is often seen as a barometer of policy direction. If he supports a 50 basis point rate cut, expectations for another rate cut in June will significantly increase.

Policy Guidelines

The Bank of England has maintained the phrase "gradual and cautious" for interest rate cuts since February, with the addition of the word "cautious" to assess the impact of Trump's trade policies. If this wording is removed, it may indicate a shift in policy focus from fighting inflation to stabilizing growth, further signaling continued easing.

The Bank of England is expected to significantly lower its growth outlook for 2026.

Trump Effect

The Bank of England will conduct its first comprehensive assessment of the impact of U.S. reciprocal tariffs on Thursday. Since the last meeting, Trump has introduced multiple tariff measures, causing turmoil in the financial markets. Although some punitive tariffs have been delayed to allow for negotiation time, other countries have not yet taken retaliatory actions.

Due to the unclear direction of U.S. policies, the Bank of England may present various scenario forecasts, highlighting uncertainty. The UK's Office for Budget Responsibility and the International Monetary Fund have previously adopted similar approaches.

But the general consensus is that U.S. tariffs will suppress growth and ease inflationary pressures.

Bank of England Governor Bailey warns of "growth shocks," and hawkish committee member Megan Greene also acknowledges that tariffs may suppress UK prices.

The trade war that is fully erupting will have a heavy impact on the UK economy.

Economic Forecast

In the quarterly monetary policy report, the Bank of England will update growth and inflation expectations. Although short-term data is better than expected, trade conflicts may lead to a downward revision of the outlook.

The conflict creates a deflationary effect by lowering oil prices and appreciating the pound (against the dollar), reducing import costs. The central bank's forecast may indicate that inflation will return to the 2% target, implicitly suggesting the rationale for easing.

However, the £26 billion increase in National Insurance contributions effective in April may raise business costs, and the Bank of England needs to assess the extent to which these costs are passed on to prices.

Cheaper energy may suppress inflation this year.

Market Betting

After Trump raised tariffs, traders increased their bets on the Bank of England cutting interest rates, expecting a total of 100 basis points to be cut over the remaining six meetings this year (including this one). Since the easing began in August last year, the Bank of England has cut rates by 25 basis points at every other meeting.

Apart from the two emergency rate cuts in March 2020 at the beginning of the pandemic, the Bank of England has never cut rates consecutively since the financial crisis in 2009. But investors believe that there is a high likelihood of another rate cut in June.

Traders expect there will be four more rate cuts this year.

Quantitative Tightening

Affected by market fluctuations triggered by Trump's tariffs, the Bank of England suspended the sale of long-term government bonds last month, and may update the progress of its quantitative tightening plan this time. It has emphasized that asset sales should be "conducted discreetly," but this move could push up bond yields, contradicting the interest rate cut policy.