Money: Bank of England cuts interest rate - as governor hits out at media over UK growth

Bank of England cuts base rate to 4.25%

The Bank of England has cut interest rates from 4.5% to 4.25%, citing Donald Trump's trade war as one of the key reasons for the reduction in borrowing costs.

In a decision taken shortly before the official confirmation of a trade deal between Britain and the US, the Bank's Monetary Policy Committee voted to reduce borrowing costs in the UK, saying the economy would be slightly weaker and inflation lower in part as a result of higher tariffs. However, it stopped short of predicting that the trade war would trigger a recession.

Further rate cuts are expected in the coming months, though there remains some uncertainty about how fast and how far the MPC will cut - since it was split three ways on this latest vote.

Two members of the nine-person MPC voted to reduce rates by even more today, taking them down to 4%. But another two on the committee voted not to cut them at all, leaving them instead at 4.5%.

In the event, five members voted for the quarter-point cut - enough to tip the balance - with the accompanying minutes saying that while "the current impact of the global trade news should not be overstated, the news was sufficient for those members to judge that a reduction in Bank Rare was warranted".

Even so, the Bank's analysis suggests that while higher tariffs were likely to depress global and UK economic growth, and to help push down inflation, the impact would be relatively minor, with growth only 0.3% lower and inflation only 0.2% lower. 

The governor, Andrew Bailey, said: "Inflationary pressures have continued to ease so we've been able to cut rates again today. 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. Ensuring low and stable inflation is our top priority."

The Bank raised its forecast for UK economic growth this year from 0.75% to 1%, but said that was primarily because of unexpectedly strong output in the first quarter. 

In fact, underlying economic growth remains weak at just 0.1% a quarter. It said that while inflation was expected to rise further in the coming months, peaking at 3.5% in the third quarter, it would drop down thereafter, settling at just below 2% towards the end of next year.

What mortgage holders should be doing now

Money blog regular David Hollingworth, associate director at L&C Mortgages, has provided some advice for mortgage holders - or those looking for a deal - on the back of the base rate cut.

Why rates won't automatically fall

Hollingworth says today's cut was already priced in to many deals on the market.

"Although we'd hope to see lenders continue to make improvements, the base rate fall won't necessarily result in major cuts," he says.

"Borrowers holding off in the hope of further drops may also want to think about how quickly things can change. Just as rates have dipped again there's no knowing what may be round the corner. 

"Taking a deal and keeping it under review may be the better option. That will protect against any turnaround in rates but still gives the flexibility to revisit and switch to a cheaper deal before the deal completes, if rates do improve further."

What does it mean for trackers and variable rates?

"The primary winners of today's decision will be those with rates directly pegged to base rate," Hollingworth says. " They can expect to see the reduction feed through to their mortgage rate and a cut in monthly payment."

Hollingworth says monthly payments on a £200,000, 25-year repayment mortgage could fall by around £29 as a result of the cut. 

"Not all deals guarantee to mirror base rate movement and lenders can adjust standard variable rates as they like," he says.

Those with fixed rates about to end

On this tranche of borrowers, Hollingworth says: "The good news for fixed-rate borrowers coming to the end of a deal is that rates have been falling.

"That's because today's cut was so widely expected that it's already allowed lenders the chance to improve their rates. 

"There's still plenty of tweaking of rates in the market but fixed rates are looking to predict what will happen rather than react to base rate movement, so we are unlikely to see fixes plummet further because of today's cut."

Rate cut at end of year on a knife edge

In recent weeks, traders had become sure that the interest rate would fall to 3.5% by the end of the year.

But with members of the Bank's rate-setting Monetary Policy Committee split three ways on whether to hold rates or cut by 0.25 points or by 0.5 points, markets have become less certain.

It means the anticipated rate drop to 3.5% by December is on a knife edge.

At many points this afternoon, expectations flipped and traders instead were forecasting they would stay at the higher 3.75%.

Next time the rate-setters meet, in June, there's an 80% chance of no further cuts, as indicated by London Stock Exchange Group (LSEG) data.

Another 0.25 percentage points drop will happen in August, traders have priced in, with a final quarter percentage point fall this year occurring in November.

'This is not doom and gloom': Governor calls out coverage suggesting Bank has 'slashed' growth forecast

We have not slashed our growth forecasts, despite media reports, says the governor.

"This is not doom and gloom at all.

"If you're going to write an article saying we've slashed our growth forecasts, we really haven't, is the answer."

The Bank of England judged UK GDP growth to have slowed since the middle of 2024, but predict it will average 1% this year, an upgrade from their February forecast of 0.75%.

The economy will then expand at a weaker than anticipated pace over 2026 - down from 1.5% to 1.25% - as the impact of tariffs hit trade.

Nationwide cuts standard and tracker rates

Nationwide is among the first lenders to respond to the base rate cut.

It has cut its standard mortgage rate by 0.25% - this will be 6.99% from 1 June.

These rates are what you fall onto when your mortgage deal expires, and most lenders should follow this lead.

The building society will also cut its tracker from 1 June.

'Puzzle' in balance of voting at BoE could be bad news for rate cuts, says big lender

As we told you a short while ago, five of the Bank's rate-setters voted for the cut from 4.5% to 4.25%.

Two others voted for a bigger cut to 4% and two voted for a hold.

The fact that two wanted no change could indicate rates won't come down as rapidly as many analysts have forecast, says Peter Stimson, head of product at the mortgage lender MPowered.

"The last time the Bank of England's rate-setting committee voted to reduce the base rate, all nine members were unequivocally in favour.

"Then, as now, the decision was never in doubt. But the fact that this time two members wanted to hold interest rates at 4.5% is a puzzle.

"The UK's darkening economic outlook and the very real threat of a global recession have led the mortgage markets to price in a steady ratcheting down of the base rate this year.

"But the Bank's tinge of caution today hints that the next cut may not come as soon as thought, and raises the question that the mortgage market might have got somewhat ahead of itself."

In recent weeks the swaps market has been suggesting that the next base rate cut could come as soon as June, but "that is suddenly looking less likely", says Stimson.

Trade uncertainty could lead to faster cuts, says deputy governor

Bank decision-makers are asked if more trade uncertainty will lead to faster rate cuts, as Andrew Bailey's news conference continues.

Deputy governor Clare Lombardelli says this could be the case, depending on whether it hits supply or demand.

Higher trade policy uncertainty could drive weaker demand or change the relationship between the pressure on resources in the economy ("slack") and pricing, she explains.

"You would see lower levels of activity, lower levels of inflation and that would change the monetary policy reaction."

Lombardelli continues: "More trade policy uncertainty could be the driver and it would suggest that, yes, monetary policy-makers would respond to those things as you'd expect, and that would mean by loosening policy."

But Bailey cautions that disruption to supply chains could change supply capacity, having a different impact on inflation.

Lombardelli says: "It is not clear that it would necessarily be the case that what we've seen on trade policy would be deflationary.

"It might... but if you look at the recent experience that all economies around the world have seen over the last few years, actually it has really shown us the importance of supply chains."

Basically, no one knows how Trump trade war will affect interest rates

Andrew Bailey now turns attention to the global economy, and what it means for the UK.

The Bank of England governor points to volatility in financial markets around Donald Trump's tariff policies. 

"Slower growth in the global economy is likely to reduce the demand for our exports and impact economic activity here in the UK," he says.

That reduction in external demand will also work to "reduce inflationary pressures in the economy", but he adds the overall impact on inflation remains uncertain.

On the one hand, he says, lower US demand for global exports could lead to lower global export prices and hence lower prices in the UK, which would reduce inflationary pressure further. 

On the other hand, higher costs in the global supply chain could push up prices.

He also welcomes the news of a UK-US trade deal, as it will "help to reduce uncertainty".

Asked by our data and economics editor Ed Conway about this deal and the impact of tariffs, Bailey says they take two things into consideration: the impact of the tariffs themselves, and the impact of trade policy uncertainty.

"We always condition our forecasts on announced policies," he adds.

And that's "obviously quite a challenge" in the current environment, because they expect the policies to change.

"I don't know what we expect to be this agreement, so we'll have to wait and see how that that comes through," he adds.

Inflation will rise to 3.5% in coming months, says Bailey - plus other factors influencing direction of rate cuts

Bank of England governor Andrew Bailey is outlining four key areas that support the Bank's decision to reduce the base rate to 4.25% and offer an indication of its intentions going forwards.

1. Inflation is falling

"Disinflation in domestic price and wage pressures is continuing," Bailey says.

Yes, headline inflation is expected to rise in the near term, but he doesn't expect it to persist.

The Bank predicts it will rise to 3.5% "in coming months" - a little less than previously thought.

Rising water bills and energy prices are among the factors that will drive up inflation, but "we should not expect them to persist".

Services inflation, meanwhile, should gradually ease, explains Bailey, adding persistence in wage growth is now the "main driver" of services inflation

2. Unproductiveness

A "small margin of slack" has opened in the UK economy, which is expected to widen over the next couple of years, he says.

"Heightened uncertainty, weak productivity growth and the continued restrictive stance of monetary policy have all been weighing on GDP growth recently."

There is also weaker demand and businesses are cautious to invest, he says.

But investment and household spending should recover, supported by lower interest rates.

3. Slack to reduce inflation

This slack in the economy should help to return inflation to 2%, the Bank's target, says Bailey.

Normalising wage growth is "particularly important" to help services inflation meet the goal.

"This process has still some way to go," he says, adding annual private sector weekly earnings growth was 5.9% in the three months to February.

"We expect wage growth to moderate," he says. Average pay rises in 2025 will be between 3.5% and 4%.

He now moves on to his fourth key message, the global economy, which we will cover in our next post. Stay tuned.

-SKY NEWS