The Bank of England is widely expected to cut its key interest rates this week, with economists and markets pointing to concerns over the economic impact of U.S. trade policies. Policymakers meet Thursday for their first rate decision since recent tariff announcements created uncertainty in global markets.
Financial markets suggest a quarter-point reduction from the current 4.5% rate is nearly certain. However, some economists argue a larger half-point cut is needed to support businesses and households facing a worsening global economic outlook.
Across the Atlantic, the U.S. Federal Reserve is anticipated to hold rates steady following its meeting Wednesday. This comes despite criticism from U.S. President Donald Trump regarding the central bank's actions and Chair Jerome Powell. The recent April jobs report showed unexpected strength in nonfarm payrolls, influencing upward pressure on U.S. borrowing costs even as other global concerns rise.
Economists warn that increased tariffs and trade disputes could lead to a slowdown in global trade volumes. While tariffs can potentially increase costs for consumers in targeted markets, they may also lead to a glut of goods elsewhere, potentially lowering inflation in countries like the UK and across the EU.
Evidence of shifting trade patterns is emerging, with figures showing falling trade volumes, including a decline in container shipping between the U.S. and some major partners. Ports like Antwerp could see shifts in traffic as trade patterns adjust to new tariffs and changing demand.
The UK inflation rate fell more than anticipated in March, but forecasts suggest it could rise this summer. However, analysts point to the existing high level of interest rates and the potential economic hit from tariffs as justification for reducing borrowing costs now.
Andrew Bailey, the Bank's governor, warned at the recent International Monetary Fund meetings that the UK economy faces a "growth shock" due to trade policies. The IMF downgraded its 2025 growth forecast for the UK following the tariff announcements.
Some members of the Monetary Policy Committee may advocate for a larger rate reduction. External economist Swati Dhingra has consistently argued for lower borrowing costs. Analysts at Morgan Stanley noted that while a half-point cut is a risk to their forecast, the current economic environment warrants a move toward lower rates sooner.