The Bank of England lowered its main interest rate by 0.25 percentage points to 4.25% on Thursday, citing the potential impact of global trade tensions, including recently announced U.S. tariffs, on the UK economy.

The Monetary Policy Committee (MPC) voted narrowly in favour of the rate cut, with five members supporting the move and four dissenting. Two members, Swati Dhingra and Alan Taylor, advocated for a larger 0.5 percentage point reduction, while Chief Economist Huw Pill and external member Catherine Mann preferred to maintain the existing rate.

This decision represents the Bank’s first policy adjustment since U.S. President Donald Trump’s announcement of extensive tariffs on April 2. That development has contributed to increased volatility in financial markets and led the International Monetary Fund to revise down its global growth projections, including those for the UK.

The Bank acknowledged that the wider effects of global trade policy could weigh on domestic output and inflation, though it also noted the high level of uncertainty around the outlook. Governor Andrew Bailey stated: “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.”

Since mid-2024, the Bank has lowered interest rates by the same cumulative amount as the U.S. Federal Reserve but less than the European Central Bank. UK policymakers remain cautious due to strong wage growth and the risk of inflation staying above the Bank’s 2% target.

In its policy statement, the Bank reiterated that it does not follow a fixed course on interest rates and maintained its guidance of a “gradual and careful” approach. While the MPC minutes acknowledged that global trade tensions present a downside risk, they cautioned against overstating the impact. Market expectations, however, suggest a possibility of accelerated easing later in the year.

The minutes also indicated that, absent the U.S. tariff changes, the decision would have been more uncertain. For three members backing the 0.25 point cut, the move would have been “finely balanced” without the new trade measures. As of April 29, Bank estimates suggest the tariffs could reduce the UK’s economic output by 0.3% over three years and assist in bringing inflation back to target more quickly.

A bilateral U.S.-UK agreement to ease some of the tariffs is expected shortly, but the Bank noted that roughly two-thirds of the forecast impact on UK growth stems from global effects rather than direct tariffs on British exports.

Across the Atlantic, the U.S. Federal Reserve left rates unchanged this week. Chair Jerome Powell cited continued uncertainty about the implications of U.S. trade policy for the domestic economy.

Ahead of the BoE’s rate decision, financial markets had priced in a fall in UK rates to around 3.5% by year-end, a shift from the 3.75% to 4% range expected in early February before the full scope of U.S. trade actions became apparent.

In its updated quarterly projections, the Bank revised down its inflation forecast for 2025, now expecting a peak of approximately 3.5%, compared to a prior estimate of 3.75%. This reflects a rise from the March reading of 2.6%, due in part to increases in regulated energy and water bills effective from April.

The Bank now anticipates inflation will return to the 2% target in the first quarter of 2027, nine months earlier than previously forecast. The two-year inflation outlook, a key horizon for policy decisions, has also been revised down to 1.9% from 2.3%.

GDP growth for 2025 is forecast at 1%, up slightly from the 0.75% projected in February. This adjustment reflects stronger-than-expected data at the end of 2024 and the beginning of 2025, though the Bank warned that the first-quarter performance may not indicate a sustained trend.

Projections for 2026 were revised downward, with expected growth reduced from 1.5% to 1.25%. Underlying quarterly growth is currently estimated at 0.1%.

Wage growth, which is currently close to 6%, is expected to decline to around 3.75% by year-end. Unemployment is projected to rise modestly to 5% in 2026, up from 4.8%.

The Bank also introduced new scenario models in this policy round. These replace earlier models focused on domestic inflation persistence and labour market tightness. One scenario considers the effects of extended uncertainty around trade and other policies, which could lead to weaker consumer spending and investment. Another explores a case in which low productivity and rising wages contribute to a wage-price spiral, potentially adding 0.4 percentage points to inflation.

The Bank’s updated outlook reflects both near-term caution and structural concerns about long-term growth, amid continued external uncertainty.