Bank of England Cuts Interest Rates as Tariff Deal Gets Struck

The Bank of England has reduced its benchmark interest rate by 25 basis points to 4.25% in May, marking the fourth cut since August 2023. This decision, made by a narrow 5–4 majority within the Monetary Policy Committee, is hoping to provide a cushion within the UK economy against the dual pressures of a cooling domestic labor market and escalating global trade tensions.

The rate cut coincides with the announcement of a new trade agreement between the United States and the UK. While full details are pending, the deal is expected to alleviate some of the uncertainties that have recently clouded the economic outlook.

Tariffs and Economic Growth

The Bank of England’s decision was influenced by concerns over the impact of U.S.-imposed tariffs on UK exports. Governor Andrew Bailey acknowledged the potential benefits of the new US-UK trade deal, stating that it could remove some of the uncertainty facing the UK economy. However, he also warned of the unpredictable nature of the global economy, especially in light of recent tariff implementations.

Inflation and Labor Market Dynamics

Rate cuts come amid a changing economy. After jumping upward in January, inflation has come down each month this year, although rates are still above the target rate of 2%.

UK wage growth eased to 5.6% annually in the three months to March 2025, down from 5.9%. At the same time, payroll employment fell by 47,000 between February and March. These trends suggest easing inflationary pressures, aligning with the Bank of England’s view that inflation is gradually subsiding.

However, Chief Economist Huw Pill expressed caution, highlighting that inflation might remain more persistent than anticipated. He emphasized that monetary policy might need to be more aggressive or sustained to achieve the inflation target.

In making the announcement to lower interest rates, the Bank of England was optimistic, but cautious, about future cuts.

If those pressures continue to ease, we should be able to reduce interest rates further over time. But we can’t say precisely when or by how much. That depends on how the situation evolves. So, we will monitor the British economy and global developments (such as changes in trade policies) very closely, and take a gradual and careful approach to reducing rates further. – Bank of England

Implications for Homeowners

The reduction in interest rates has direct implications for homeowners and prospective buyers.

There are about 600,000 homeowners in the UK who have mortgages tracking the Bank Rate, so rate cuts will mean lower payments. The most recent cut, however, is estimated to lower the typical tracker mortgage payment by about £29 a month.

Lower borrowing costs mean more favorable mortgage rates, prompting many to reassess their financial positions. This environment often leads individuals looking to brands like Purplebricks to determine, "how much is my house worth?" as they consider refinancing options or entering the property market.

However, it's essential to approach such decisions with caution. While lower interest rates can stimulate housing demand, other factors, including wage growth and employment stability, play crucial roles in determining property values. You should also discuss your options with a trusted financial advisor. For example, getting a professional appraisal and estate valuation can help you make a better decision on whether it’s a good time to put your house up for sale.

The average UK property is now valued at £268,000, around £13,000 higher than a year ago. However, the growth in pricing slowed in April. As market valuations can change quickly, sellers need an accurate appraisal to set rates consistent with the market.

What’s Next for UK Interest Rates and Inflation?

The Bank of England will next review rates in June. Most analysts expect the Bank Rate to continue to fall in 2025, although any bumps in the inflation rate or higher-than-expected wage growth could put that on hold.

The Bank of England also expects inflation to rise again this year, as high as 3.7% by September 2025, because of increases in global energy costs and some regulated costs (like water bills). However, Bank analysts believe this is only temporary and forecasts inflation o drop back near target rates afterward.