The Bank of England is poised to announce a significant change in its monetary policy as it prepares to cut interest rates for the fourth time since August 2024. The Monetary Policy Committee (MPC) is widely expected to reduce the base rate from 4.5% to 4.25% during its meeting on May 9, 2025, a move that reflects the growing concerns over the impact of global trade tensions, particularly those stemming from U.S. President Donald Trump’s tariff policies.
This anticipated reduction comes amid a backdrop of economic uncertainty, with many analysts predicting a split vote among MPC members. While a majority is expected to support a 25 basis-point cut, some members may advocate for a more aggressive 50 basis-point reduction. This potential for a larger cut underscores the heightened concerns regarding the economic ramifications of Trump’s tariffs, which have already begun to affect growth forecasts for the UK economy.
According to economists at Pantheon Macroeconomics, the rate cut is seen as a “shoo-in,” with expectations of a seven-to-two split in favor of the 25 basis-point reduction. They emphasize that the MPC will need to balance the risks of inflation against the need to stimulate economic growth. The latest inflation figures show a decrease to 2.6% in March, down from 2.8% in February, providing some leeway for the MPC to act.
Steve Matthews, Investment Director at Canada Life Asset Management, notes that while a 50 basis-point cut will be firmly on the agenda, he expects the Bank to ultimately opt for a more cautious approach, settling for a 25 basis-point cut to 4.25%. “The economic backdrop has changed significantly since the Bank’s last meeting,” he said, highlighting the pressures from global trade disruptions and slowing U.S. GDP growth.
In the lead-up to the decision, market sentiment has shifted, with traders pricing in a 95% probability of a quarter-point cut. This reflects a broader consensus among economists who anticipate at least two more rate cuts from the Bank of England by the end of 2025. Deutsche Bank has even suggested that a quarter-point reduction seems like a certainty at this stage, indicating that the market is preparing for a shift in monetary policy.
The implications of a rate cut extend beyond just borrowing costs. For homeowners, particularly those with tracker mortgages, a reduction could mean an immediate decrease in monthly repayments. Nearly 600,000 homeowners have mortgages that track the Bank of England’s rate, and a typical reduction of 0.25 percentage points could lower monthly payments by approximately £29, according to calculations by UK Finance.
However, the impact on savers may not be as positive. As interest rates fall, the returns on savings accounts are likely to decrease, which could affect individuals who rely on interest income. Anna Bowes, a savings expert, noted that while fixed savings rates remain competitive, a cut in the base rate typically leads to reductions in interest offered by savings providers.
In addition to the anticipated rate cut, the MPC will also provide updated forecasts for the UK economy, which may reflect a downward revision due to the ongoing trade war. Sanjay Raja, Chief UK Economist at Deutsche Bank, explained that while the GDP growth for 2025 might be revised slightly higher based on a strong first quarter, the second quarter projections are likely to be toned down due to the unfolding trade shock.
As the UK grapples with these economic challenges, the housing market has shown signs of resilience. The average house price increased by nearly £900 between March and April, according to the Halifax house price index. This uptick, however, contrasts with a report from Nationwide, which indicated a slight decline in house prices during the same period. Such discrepancies in market data highlight the complexities facing potential buyers and sellers amid fluctuating economic conditions.
The looming decision also comes at a time when the U.S. Federal Reserve has opted to keep interest rates unchanged, further complicating the global economic landscape. Lale Akoner, a global market analyst, pointed out that the Fed’s reluctance to cut rates could lead to a prolonged period of restrictive policy, potentially impacting the UK’s economic recovery.
As the Bank of England prepares to make its announcement, the focus will not only be on the rate cut itself but also on the accompanying guidance from the MPC regarding future monetary policy. Investors and analysts will be keenly watching for indications of how the Bank plans to navigate the uncertainties posed by Trump’s tariffs and their potential impact on inflation and growth.
In summary, the Bank of England's decision to cut interest rates is highly anticipated and reflects a broader strategy to support economic growth amid global trade tensions. As the MPC meets today, all eyes will be on the outcome and the implications it holds for borrowers, savers, and the overall UK economy.
