The Bank of England cuts interest rates to 4.25%: the “Trump shock wave” tears the consensus, and the nine-member committee now has three factions

The Zhitong Finance App learned that the Bank of England cut interest rates by 25 basis points to 4.25% as Donald Trump's global trade war dragged down the UK's economic growth. This decision led to the division of senior officials into three factions, and the resolution was made even before the US President hinted that an agreement to reduce UK export tariffs was about to be reached.

Of the nine members of the Monetary Policy Committee, five supported cutting interest rates by 25 basis points, two advocated a larger 50 basis point cut, and two others voted to keep interest rates unchanged. In view of global economic fluctuations caused by Trump's comprehensive tariffs, the Commission maintained “progressive prudent” easing policy guidelines.

“Continued easing inflationary pressure has enabled us to cut interest rates again,” Governor Andrew Bailey said in a policy statement. “The past few weeks have highlighted the unpredictability of the global economy, which is why we need to stick to a gradual and prudent approach.”

Interest rate decisions are usually voted on the day before they are announced. A few hours after Wednesday's meeting, Trump said the US was about to announce a trade agreement with a major country, which was later reported to involve Britain. However, the Bank of England made it clear that the global impact of US tariffs on the open British economy is still a major threat. According to estimates, rising costs and increased uncertainty will reduce UK output by 0.3 percentage points within three years and reduce inflation by 0.2 percentage points within two years.

Since the Bank of England's interest rate meeting in March, Trump has implemented a 10% global commodity tariff, 25% automobile, steel and aluminum tariffs, and imposed a 145% substantive embargo on Chinese goods. China fought back with a 125% tariff. The Bank of England's predictions are based on the premise that these policies continue.

The differences between the three factions of the committee highlight the chaos caused by US trade policy. Outside members Dingela and Taylor advocated a sharp 50 basis point cut in interest rates, arguing that “global trends in energy and trade policies may pose a downside risk to economic growth and export prices.” Meanwhile, chief economist Peel and outside member Mann tend to maintain interest rates, pointing out that the easing of financial conditions since March has reduced market borrowing costs by 40 basis points, and they are even more concerned about the stickiness of inflation caused by supply-side structural problems in the UK.

The day before this rate cut, the Federal Reserve kept interest rates in the 4.25%-4.5% range. Chairman Powell, who has been criticized many times by Trump, stressed that there will be no hasty easing until the direction of trade policy is clear. The market forecast in the Bank of England's monetary policy report suggests that interest rates will also be cut three times to 3.5% this year, and inflation is expected to reach the 2% target in the first quarter of 2027. Due to falling energy prices, peak inflation expectations were lowered from 3.7% to 3.5% in the third quarter of this year.

The Bank of England said that even after cutting interest rates, monetary policy will curb growth and inflation. Although the risk of growth is “slightly downward”, the risk of inflation still “exists in both directions”, so the Commission will “remain sensitive to a high degree of uncertainty”. The central bank also constructs two scenarios to aid decision-making: chaotic trade policies push up uncertainty to curb activity and inflation; supply chain shocks cause weak growth but high inflation.

The Bank of England raised its growth forecast for this year from 0.7% to 1%, but lowered its forecast for next year to 1.25% (previously 1.5%), leaving the 2027 outlook unchanged. We are cautious about the abnormal growth rate of 0.6% in the first quarter. The actual growth rate is estimated to be “close to zero”, mainly due to “incidental factors” where companies shipped early to avoid taxes.

The country's central bank has not updated its assessment of the impact of the £26 billion increase in employers' national insurance surcharges on employment, prices and profit margins. The unemployment rate is expected to rise slightly to 5% this year and next two years (originally 4.75%), and wage growth will continue to slow to 3.75% by the end of the year, basically in line with the 2% inflation target.