The Bank of England slashed interest rates to 4.25 per cent on Thursday and warned that Donald Trump’s global tariff war will hit economic growth over the next three years in the UK.
The central bank cut the UK’s base rate by 0.25 per cent following a slowdown in inflation in recent months. Following cuts in February and now May, the base rate is down from a high of 5.25 per cent to a level last seen in May 2023.
Andrew Bailey, governor of the Bank of England, said: “Inflationary pressures have continued to ease, so we’ve been able to cut rates again today.”
The Bank predicted that the UK economy will grow by 1 per cent this year, upgrading its previous 0.75 per cent forecast on the back of a strong start to 2025.
However, it added that recently announced US tariff plans by President Trump will dent UK growth by 0.3 percentage points over the next three years, as it downgraded its 2026 forecast.
Most of this downward impact is to come from “lower US demand for UK exports” and weaker global activity, according to the Bank’s latest report.
Chancellor Rachel Reeves said the cut in interest rates could make a “significant” difference to household finances.
She told reporters: “It’s very good news that we’ve had four interest rate cuts now in the last 10 months, and for someone on a variable rate mortgage, that can mean around £100 a month off mortgage payments. So that is significant.
“I recognise, though, that families are still struggling with the cost of living crisis, and whether it is interest rates or inflation it’s so important that this government has returned stability to the economy, because stability means lower inflation, lower interest rates, making working people better off.”
The latest cut – along with predictions of further reductions to interest rates in the coming month – is a welcome boost for hard-pressed homeowners and businesses.
The Institute of Chartered Accountants in England and Wales (ICAEW) said the Bank of England’s Thursday rate cut is a welcome boost for firms.
Suren Thiru, ICAEW economics director, said: “This cut in interest rates is a timely shot in the arm for those businesses struggling to adjust to last month’s substantial spike in business costs and households contending with burdensome mortgage costs.
“While this reduction confirms that UK interest rates are trending downwards, it won’t materially reverse the financial squeeze or slide in sentiment among households and firms, given that many other costs are rising, and global headwinds are still elevated.”
He added: “With inflation expected to be slightly more subdued and concerns over turbulence in the global economy likely to persist, even with a US-UK deal on trade, the case for accelerating the pace of interest rate cuts may still increase.”
Nathan Emerson, chief executive of Propertymark, said: “Today’s news will no doubt be extremely welcome for many, especially given current economic uncertainties. International bodies have recently stated they expect interest rates to fall in the UK as the year progresses. Overall, we hope to see interest rates further continue their downward trajectory over the course of 2025.”
He added: “The UK housing market has recently been buoyed by stamp duty threshold changes leading up to the start of April, and with the busier spring and summer months now here, this base rate reduction should attract even more buyers and sellers to the market and provide greater affordability.
“Housing is a central part of the UK economy, and we now hope to see, considering the UK government and the devolved administrations have shown a keen focus on housing growth, is that they look ahead to achieving their individual housebuilding targets to meet growing demand.”
The Bank’s announcement came just hours before the announcement from Mr Trump that the US had agreed a trade deal with UK prime minister Sir Keir Starmer.
It also highlighted, however, that multinational firms could change their pricing in the UK in order to help deal with the impact of “higher costs in other jurisdictions”.
The Bank has also predicted it will cut interest rates at a faster rate than previously expected, amid the backdrop of potentially shallower inflation and slower growth next year.
It has said interest rates are predicted to fall as low as 3.5% by the second quarter of next year, indicating a further three cuts by rate-setters.
Meanwhile, UK unemployment is also predicted to rise over the next two years, as businesses face uncertainty over trade tensions and the recent increase in wages and national insurance contributions.
The unemployment rate is set to peak at 5 per cent next year and stay at this level in 2027, according to the new forecasts. The Bank previously predicted it would rise to a high of 4.8 per cent.
Additional reporting by PA
Source: independent.co.uk
