Will interest rates be affected by Trump tariffs and when is the next Bank of England review?

Independent

08-04-2025

Interest rates have been back on a downward path in 2025, but the going is slow and at the last review the Bank of England (BoE), which decides the base rate, froze them at 4.5 per cent.
Altering the base rate is one of the ways the BoE keeps inflation under control, helps to stimulate spending and generally aims to control economic growth in line with government aims.
However, along with domestic matters, the UK economy is affected by global events - and the potential trade war as a result of Donald Trump's tariffs and retaliations to the same could well impact the BoE's decision.
When do the Bank of England meet next?
The Bank of England, or specifically its Monetary Policy Committee (MPC), meet about every seven weeks to decide on any interest rate alterations.
The last one came on 20 March when the MPC voted 8-1 to hold rates at 4.5 per cent, following a 25 basis points reduction from 4.75 per cent in February.
the next meeting is 8 May - and more markets are now pricing in an expectation of a cut on that date.
How might the BoE respond to tariffs?
As lowering interest rates is one way to push spending and encourage business investment domestically, that's the route suggested by a previous decision-maker at the BoE.
Former deputy governor and chief economist of the Office for Budget Responsibility (OBR), Charlie Bean, has urged committee members to cut rates by a full half percentage point this time around.
Speaking about his own tenure when cutting rates by more than expected during the Global Financial Crisis in 2008, he explained that the uncertainty hampering businesses making decisions and completing orders would likely present more of a threat than the tariffs themselves.
'It is not just the tariffs that are the problem, it is the huge uncertainty these actions have created, delaying buying and investment decision by businesses and consumers,' Bean told the Guardian.
'In November 2008, the markets expected a 0.25 percentage point cut, or maybe a half a per cent. But we were talking to our agents in the regions and they said business orders had fallen off a cliff. It was obviously a very serious situation. We surprised everyone with a cut of 1.5 percentage points. It was huge and it needed to be.
'The tariff situation is not of the same magnitude but this is a disinflationary shock and an event that the bank should react to, and react very strongly.'
Lower interest rates mean borrowing money is cheaper, encouraging businesses to invest in projects and personnel, while also lowering costs for people who are homeowners or have other loans. Of course, the flip side is that savers will earn less on the money they have tucked away.
What are the interest rate predictions?
Many analysts are now suggesting three further rate cuts are likely this year - but this can change suddenly and without much warning.
As recently as the March meeting, nobody expected an interest rate cut and, at that time, with markets calm and inflation slightly rising beforehand, the expectation was a tempering of that threat - so no action early in the year and maybe only two cuts ahead.
A month later, everything has changed and a much bigger potential issue is on the horizon.
Charles Luke, co-manager of Murray Income Trust, noted that 'UK bond yields have fallen sharply and are now pricing in three interest rate cuts in 2025, from two previously.'
Laith Khalaf, head of investment analysis at AJ Bell, agreed and pointed out that the changes could feed through quickly to the mortgage market.
'The market had been pricing in two interest rate cuts this year, but in short order that has now been ratcheted up to three, which would take the base rate to 3.75 per cent by the end of 2025 (based on LSEG data),' he said.
'The two year gilt yield has also fallen; we may therefore see falling interest rates feeding into mortgage pricing before too long. Likewise the cash market may see fixed rates fading to reflect the new outlook for interest rates.'