Tariff clouds overshadow growth prospects, and the Bank of England may be forced to accelerate interest rate cuts

According to the Zhitong Finance APP, the Bank of England is expected to cut interest rates by 25 basis points this week and may pave the way for its first consecutive rate cuts since 2009 in response to the global trade war initiated by U.S. President Trump.

A survey of 32 economists shows that all economists expect the Bank of England to cut rates by 25 basis points at Thursday's policy meeting. Meanwhile, 29 of the 32 surveyed economists believe that the Bank of England's Monetary Policy Committee will vote unanimously to cut rates by 25 basis points.

Most economists believe that after assessing the tariff policies of the Trump administration—and the uncertainty of future policies—that will weigh on economic growth and suppress inflation, the Bank of England will shift to a dovish stance. At the same time, most economists expect the Bank of England to lower its economic growth forecast for next year.

Some believe that the Bank of England may take an even more dovish turn. Barclays' Chief Economist for the UK, Jack Meaning, believes that the Bank of England may follow up this week's rate cut with another 25 basis point cut in June. If Jack Meaning's prediction holds, this would mark the first consecutive rate cuts by the Bank of England since the early financial crisis of 2009 (excluding two emergency rate cuts in March 2020 at the onset of the pandemic).

It is worth mentioning that the market currently expects the Bank of England to implement four rate cuts of 25 basis points each for the remainder of this year, totaling a 100 basis point reduction, bringing the benchmark rate down from 4.5% to 3.5%. After the policy meeting on March 20, the market expected the Bank of England to make two rate cuts of 25 basis points each for the remainder of the year, lowering the benchmark rate to 4%.

Since the last policy meeting of the Bank of England in March, the world has changed dramatically. Trump announced extensive imposition of so-called "reciprocal tariffs" in early April, raising concerns about a slowdown in global economic growth.

Domestically in the UK, the situation has also changed. Wage growth in the UK has consistently fallen below the forecasts released by the Bank of England in February. As investors shun U.S. assets, the pound has strengthened against the dollar, lowering import costs and causing a drop in energy prices in the UK. Additionally, according to Bank of England Monetary Policy Committee member Megan Greene, looking ahead, the shift of Chinese goods to the UK market "will generally bring about a deflationary effect."

In its February forecast, the Bank of England indicated that this year's inflation rate would peak at 3.7%. However, Bloomberg Economics currently estimates that this peak will be 3.3%. Furthermore, although the Bank of England's economic growth forecast in February was stronger than expected, Governor Bailey warned last month that the global trade war would have particularly severe impacts on open economies like the UK.

Former Bank of England official and current Senior Advisor at the Oxford Economics Institute, Michael Saunders, stated: "The rise in U.S. tariff levels and increased uncertainty in trade policy are primarily negative demand shocks that will suppress growth and inflation." "He added that this makes the decision of the Bank of England's Monetary Policy Committee easier than that of the Federal Reserve, which is facing negative supply shocks that suppress growth while pushing up inflation, requiring a trade-off between the two.

Michael Saunders believes that the Bank of England will adopt a 'least regret' strategy, 'implementing the planned easing measures ahead of schedule.' Jack Meaning also believes that there is a high likelihood that the Bank of England will accelerate the pace of interest rate cuts. He pointed out: 'I think they will almost certainly indicate that the risk balance has changed, so it is very likely that they will adjust the guidance to pave the way for consecutive rate cuts. This will open the door for a rate cut in June, but at the same time, it will not be explicitly stated to maintain flexibility.'

'Gradual and Cautious'

To confirm the new easing tendency, the Bank of England may change the guidance of 'gradual and cautious' rate cuts. Both Michael Saunders and Jack Meaning stated that the term 'gradual' may be removed. Voting discrepancies may also become a signaling mechanism. The nine members of the Bank of England's Monetary Policy Committee are expected to unanimously pass the rate cut decision on Thursday.

Dan Hanson, Chief UK Economist at Bloomberg Economics, and others believe that committee member Swati Dingra may vote in favor of a 50 basis point rate cut. Nomura Securities economist George Buckley believes that Deputy Governor Dave Ramsden and another committee member Alan Taylor may join Swati Dingra, which would reinforce the shift towards a dovish stance at the Bank of England. He stated: 'We may see more dissenting votes in favor of a 50 basis point rate cut, which would increase the likelihood of the Bank of England further cutting rates by 25 basis points in June.'

Moreover, the challenges faced by the Bank of England have become increasingly complex due to the uncertainty in the macroeconomic backdrop caused by the trade war initiated by Trump. To address this uncertainty and assist in communication with the market, the Bank of England may use scenario analysis more extensively in its latest forecasts.

Jack Meaning indicated that the Bank of England may replace the current three 'scenarios' reflecting different inflation paths with three tariff scenarios, providing a more comprehensive forecast. He stated that in addition to the core scenario, there should be a scenario involving trade retaliation and a scenario of concessions from the White House, 'so that the market and members of the Monetary Policy Committee can assign probability weights to these three scenarios.'

The impact of Trump's tariff policy will be most evident in the Bank of England's expectations for economic growth. Dan Hanson expects that, given the stronger-than-expected performance at the beginning of the year, the Bank of England will slightly raise its growth forecast for 2025 from 0.7% in February to 0.8%, but will lower its growth forecast for 2026 from 1.5% to 1%—when the tariff effects will be most pronounced. He added that the forecasts for inflation and declining market borrowing costs imply that the Bank of England should lower interest rates to at least 3.75% by the end of this year