Prime Highlights:
Bailey indicated that further rate cuts are possible as the disinflation process progresses, but decisions will be made on a case-by-case basis.
The Bank of England halved its 2025 UK growth forecast from 1.5% to 0.75%, reflecting slower-than-expected economic performance.
Key Background:
Bank of England Governor Andrew Bailey recently commented on the potential consequences of U.S. tariffs, emphasizing that the United Kingdom cannot avoid their effects, even if it is not the direct target of such measures. In an interview, Bailey highlighted the indirect impact that tariffs could have on the UK, primarily through their effect on global economic growth and inflation. He pointed out that if tariffs lead to economic fragmentation, it could hinder global growth. The impact on inflation, however, remains uncertain, depending on the responses of other countries and the ripple effects on international trade.
While U.S. President Donald Trump has suggested that the UK could face tariffs, he has also hinted at the possibility of negotiating a deal. The U.S. remains the UK’s largest trading partner, with over 17% of the UK’s total trade occurring with the U.S. As per Bailey, the UK does not have a significant trade imbalance with the U.S., which is a key point of concern for President Trump, who has expressed dissatisfaction with trade imbalances. Moreover, Bailey noted that services, a major component of UK trade, are less affected by tariffs compared to goods.
In addition to addressing the potential tariff impact, Bailey announced that the Bank of England had reduced its benchmark interest rate by 25 basis points to 4.5%. The decision was made by seven out of nine members of the Monetary Policy Committee (MPC), who supported the rate cut, while two members preferred a larger reduction. Bailey described the move as careful and gradual, indicating that future rate cuts would be assessed on a meeting-by-meeting basis as the disinflation process unfolds. He also warned that economic uncertainties could lead to inflationary pressures, though these are expected to be temporary. Furthermore, the Bank of England revised its growth forecast for the UK, halving the 2025 projection from 1.5% to 0.75%, signaling a slowdown in the economy.