The Bank of England (BoE) lowered its main interest rate by 0.25 percentage points to 4.25% on Thursday, despite an unexpected three-way split among policymakers as U.S. President Donald Trump's tariffs appear to be increasingly weighing on global economic growth prospects.
The BoE's rate-setters voted 5-4 in favor of the decision to cut borrowing costs by a quarter point.
Two members of the Monetary Policy Committee (MPC), Swati Dhingra and Alan Taylor, voted for a bigger half-point cut, while Chief Economist Huw Pill and external member Catherine Mann wanted to keep rates on hold.
Thursday's decision is the British central bank's first since Trump announced wide-ranging tariffs on April 2, which triggered temporary market turmoil and prompted the International Monetary Fund (IMF) to cut its growth forecasts for most major economies, including Britain.
The BoE said it thought tariff increases by the U.S. and other countries would weigh somewhat on British economic growth and push down on inflation, but stressed the outlook is unclear.
"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," BoE Governor Andrew Bailey said.
Short-dated British government bond yields, which are sensitive to speculation about interest rate changes, jumped after the announcement. Sterling rose by around a third of a cent against the U.S. dollar.
Some investors had bet the BoE would signal that it was gearing up to cut rates more quickly.
"The big question now is whether this gradualism will persist," Alpesh Paleja, deputy chief economist at the Confederation of British Industry, said.
"With so many moving parts in the global and domestic outlook, the Committee may maintain a cautious stance. But with inflation risks increasingly tilting to the downside, a faster pace of rate cuts may become more palatable to a growing number of members."
Since mid-2024, the BoE has cut interest rates by the same amount as the U.S. Federal Reserve (Fed) but less than the European Central Bank (ECB), due to concerns about high wage growth as well as the risk of persistently above-target inflation.
The BoE said that it had no pre-set path for rates and kept unchanged its "gradual and careful" language. Elsewhere in its policy meeting minutes, it said the impact of global trade tensions "should not be overstated."
"Interest rates are not on autopilot. They cannot be," Bailey told a news conference. "Instead, the MPC must continue to respond carefully to the evolving economic circumstances and the outlook for inflation in the U.K."
A rate cut this month would have been less certain without the drag from tariffs, however. For three of the policymakers voting for a quarter-point reduction, the decision to cut would have been "finely balanced" if the tariffs had not come into effect, the minutes showed.
Based on the situation as of April 29, the BoE estimates the U.S. tariffs will reduce the size of Britain's economy by 0.3% in three years and help return inflation to target sooner.
Later on Thursday, the United States and Britain are expected to announce a deal to lower some of Trump's tariffs on British exports. However, the BoE said around two-thirds of the damage it forecast to British growth was due to the broader effects of tariffs on the world economy rather than direct tariffs on British goods.
On Wednesday, Fed Chair Jerome Powell highlighted ongoing uncertainty about the impact of trade policy on the economy as the U.S. central bank held off from a further rate cut.
Before Thursday's BoE decision, financial markets expected U.K. interest rates to fall to close to 3.5% by year-end, compared with expectations of 3.75% or 4% in early February before the scale of Trump's tariff plans became evident.
In a quarterly forecast update on Thursday, the BoE trimmed its expectation for inflation this year, seeing it peaking at around 3.5%, lower than a previous forecast of around 3.75%. That is up from the latest official reading of 2.6% in March, however, as higher regulated household energy and water bills kick in from April.
The BoE sees inflation back at its 2% target in the first quarter of 2027 – nine months earlier than it forecast in February – and expects inflation in two years, a key horizon for the MPC, to fall to 1.9%, lower than the 2.3% it forecast before.
The central bank expects the economy to grow this year by 1%, a bit stronger than a forecast of 0.75% made in February, thanks to a strong end to 2024 and robust official data at the start of 2025. However, the central bank said that the first-quarter growth bounce looked erratic.
It cut its 2026 growth forecast to 1.25% from 1.5% and in the near term said the economy's underlying quarterly growth rate was just 0.1%.
Pay growth is seen slowing sharply from close to 6% now to 3.75% by year-end, while unemployment is forecast to edge up to 5% of the workforce next year from about 4.8% now.
The BoE also set out new alternative economic scenarios, moving away from a previous set which focused on the persistence of domestic inflation and a tight labour market.
The new set looked at one case where elevated uncertainty about trade and other policies weighs on consumption and investment, pushing down on growth and inflation.
Another looked at further weak productivity and a potential wage-price spiral, which would add an extra 0.4 percentage points to the inflation rate.
