The Bank of England is set to announce its next interest rate decision on Thursday, May 8 at 15:00 (GMT+4), with expectations pointing towards a 25-bps rate cut.
The UK economy is currently facing big pressure from tariffs, a core threat to the UK labor market and economic growth. The expected rate cut could signal more reductions ahead as uncertainty from US President Trump’s trade war impacts global growth.
Rate Cut Priced in and MPC Vote
The Bank of England’s expected 25 basis point rate cut is almost fully priced in by financial markets. This cut would mark the fourth reduction from last year’s interest rate high of 5.25%.
The vote split may also be a signaling mechanism. All nine committee members are expected to vote for a cut on Thursday, the second this year.
Some economists, including former BoE deputy governor and external MPC member Swati Dhingra, might push for a half-point cut to counter the worsening global outlook. Deputy Governor Dave Ramsden and external member Alan Taylor may also support a larger reduction, signaling a potential shift to a more dovish stance. ⁽¹⁾
The decision comes as UK economic growth faces significant challenges. BoE Governor Andrew Bailey has warned of a “growth shock” caused by Trump’s tariffs, with the IMF (International Monetary Fund) downgrading its 2025 UK growth forecast to 1.1% from 1.6%. ⁽²⁾
Trump’s trade wars have complicated the BoE’s task by making the macroeconomic picture unstable. To deal with the uncertainty, the BoE is likely to make greater use of scenarios in the new forecasts published alongside the rate decision.
Inflation Trends and Economic Indicators
Recent inflation data has eased some concerns for the BoE. CPI YoY declined to 2.6% in March from 2.8% in February, which was less than anticipated by the BoE. Core CPI however remained high at 3.4% in March. Wage inflation is at 5.6% in March, which remains high. ⁽³⁾
Despite stronger-than-expected GDP growth earlier this year, the outlook for growth has been downgraded by economists for 2026 to 1% from 1.5%.
A combination of falling inflation, subdued consumer spending, and weak business confidence indicates the need for lower interest rates to support economic activity.
The UK labor market currently remains stable as the UK ILO unemployment rate held steady at 4.4% in March. Additional details of the report showed that the number of people claiming jobless benefits increased by 18.7K in March, better than the expected figure of 30.3K. The Employment Change data for March came in at 205K versus 144K in January. ⁽⁴⁾
PMI data for both manufacturing and service sectors has shown contractions of 45.4 and 49. These numbers could be a cause for concern for the BoE, with both sectors slowing down. ⁽⁵⁾
Bank of England Braces for Tariffs
President Trump’s “liberation day” tariff plan, which includes 10% tariffs on all nations, 25% on imported cars, steel, aluminum, and a 145% tariff on Chinese imports, has caused chaos across global markets.
Retaliatory measures, such as China’s 125% tariffs, have increased tensions, leading to a sharp decline in container shipping and trade volumes between the US and its major partners. This uncertainty has damaged business and consumer confidence worldwide.
However, markets did find some relief after Trump agreed to a 90-day pause on tariffs with all countries except China.
In the UK and EU, tariffs may have a disinflationary effect but could fuel inflation in the US. According to economists, a surplus of goods that were initially intended for the US could flood the UK’s and Europe’s markets, lowering prices in the process. ⁽⁶⁾
UK inflation has fallen due to declining energy prices, a weaker dollar, and lower export prices from China. MPC member Megan Greene stressed that because of these considerations, tariffs are more likely to reduce inflation pressures in the UK than increase them. ⁽⁷⁾
The UK’s Outlook
Future guidance from the BoE could indicate a shift from its earlier “gradual and careful” approach to rate cuts, possibly paving the way for a June cut and the central bank’s first consecutive reductions since 2009.
Financial markets are speculating on interest rates dropping to 3.5% by year’s end, faster than the BoE had previously predicted, with three more quarter-point reductions. ⁽⁸⁾
The BoE might modify its forecasts to assess the uncertainty of Trump’s trade plans, replacing its current inflation-focused cases with tariff-specific scenarios.
Traders and investors will monitor the BoE’s statements and comments during the press conference to assess the impacts of President Trump’s aggressive tariff policy on the UK economy and how the BoE will move forward. Pound Sterling will most likely be volatile during the event as the statements and comments will determine its path.
