Bank of England expected to cut interest rates by 25 basis points, first assessment of Trump tariff toxicity

Source: Jinshi Data

The Bank of England will announce its decision at 19:02 Beijing time on Thursday, two minutes later than usual, to mark the 80th anniversary of Victory in Europe Day. The central bank is expected to cut interest rates by 25 basis points and may hint at further cuts in June. This may be the first consecutive rate cuts since 2009, and the US trade conflict is casting a shadow on the economic growth outlook.

All 32 economists surveyed by Bloomberg expect the Monetary Policy Committee to cut the benchmark interest rate from 4.5% to 4.25%, of which 20 believe that at least one committee supports a 50 basis point cut. The futures market has also almost completely priced in this 25 basis point rate cut and believes that there is a high probability of another rate cut next month.

Since August last year, the Bank of England has cut interest rates three times and paused in February this year. But because the high reciprocal tariffs announced by US President Trump may drag down the global economy, traders expect the Bank of England to cut interest rates to 3.5% by the end of the year.

Voting Differences

The rate cut is expected to be passed unanimously, with only three economists surveyed believing that some members will support keeping the rate unchanged. This shows that a dovish tendency has gradually formed within the central bank, with some members advocating more aggressive easing to avoid growth risks.

The most dovish members, Swati Dhingra and Alan Taylor, hold this position. Catherine Mann unexpectedly supported a 50 basis point rate cut in February, but turned to the majority in March to postpone the action.

Another key figure is Dave Ramsden, the deputy governor responsible for markets, whose voting tendency is often seen as a policy vane. If he supports a 50 basis point rate cut, expectations of another rate cut in June will increase significantly.

Policy guidance

The Bank of England has maintained the statement of "gradual and cautious" rate cuts since February, and the word "cautious" was added to assess the impact of Trump's trade policy. If this wording is deleted, it may mean that the policy focus will shift from fighting inflation to stabilizing growth, further releasing a signal of continued easing.

Trump effect

The Bank of England will conduct its first comprehensive assessment of the impact of reciprocal U.S. tariffs on Thursday. Since the last meeting, Trump has introduced a number of tariffs, causing turmoil in financial markets. Although some punitive tariffs have been suspended to allow time for negotiations, other countries have not yet retaliated.

With the direction of U.S. policy unclear, the Bank of England may present multiple scenario forecasts, highlighting uncertainty. The Office for Budget Responsibility and the International Monetary Fund have previously taken similar approaches.

But the general consensus is that US tariffs will curb growth and ease inflationary pressures.

BoE Governor Bailey warned of a "growth shock", and hawkish member Megan Greene also acknowledged that tariffs could suppress UK prices.

Economic forecasts

In its quarterly monetary policy report, the Bank of England will update its growth and inflation forecasts. While short-term data has been better than expected, the trade conflict could lead to a downgrade in the outlook.

The conflict has a deflationary effect through lower oil prices and a stronger pound (against the dollar), making imports less expensive. The central bank's forecast may show that inflation will return to the 2% target, implicitly suggesting that easing is reasonable.

However, the 26 billion pound increase in national insurance taxes that came into effect in April may push up corporate costs, and the Bank of England needs to assess the extent to which it will be passed on to prices.

Market bets

After Trump imposed tariffs, traders increased their bets on the Bank of England to cut interest rates, expecting a cumulative 100 basis point cut in the remaining six meetings (including this one) this year. Since launching easing in August last year, the Bank of England has cut interest rates by 25 basis points at every other meeting.

Except for two emergency rate cuts in March 2020 at the beginning of the epidemic, the Bank of England has not cut interest rates consecutively since the financial crisis in 2009. But investors believe that there is a high probability of another rate cut in June.

Quantitative Tightening

The Bank of England suspended its long-term bond sales last month due to market volatility caused by Trump's tariffs, and may update the progress of its quantitative tightening plan this time.It has stressed that asset sales should be "low-key", but this move may push up bond yields, which is inconsistent with the interest rate cut policy.