THE threat of a global trade war is set to tip the balance at the Bank of England toward more interest-rate cuts, investors and economists say.
The raft of tariffs unveiled by US President Donald Trump boosted expectations that the UK central bank will stick with a once-a-quarter easing pace that only a few weeks ago looked to be in doubt.
BOE Governor Andrew Bailey has said that the potential impact of tariffs on inflation was “ambiguous”, with officials concerned over lingering domestic price pressures.
However, Trump’s announcement of the steepest American levies in a century appeared to cement the view that UK inflation will be dampened by the hit to growth and trade diversion effects, as sellers in countries such as China lower prices in a bid to find alternative markets for their goods.
The reluctance of the UK government to retaliate with tariffs on US goods also reduces the inflation threat.
On Thursday, traders ramped up rate-cut bets and put the odds of another quarter-point reduction in May at almost 90 per cent – up from 55 per cent only a few weeks ago. They are pricing in 66 basis points of easing this year, the equivalent of almost three more cuts.
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Thomas Pugh, economist at RSM UK, said the tariffs mean “another year of stagnation at best” for the UK economy, putting the impact at between 0.2 per cent to 0.5 per cent of GDP over the coming years.
“This reduction in growth will probably make the BOE more likely to cut interest rates this year, so we still anticipate three more 25 basis-point cuts in 2025,” he said.
Ahead of Trump’s announcement, some rate-setters speculated that the effect of the tariffs would be disinflationary.
Swati Dhingra, the most dovish official at the BOE, said there is likely to be a “negative overall adjustment in UK prices,” pointing to trade diversion effects in the first Trump administration.
“There was a 50 per cent drop in steel prices because Chinese exporters now needed new markets to be sending their goods to, so we end up in a situation where global prices in general see somewhat of a reduction,” she said. “Add to that the fact that global activity is likely to also be negatively impacted.”
Megan Greene, a more hawkish rate-setter, also highlighted a possible trade diversion impact, saying this could happen “fairly quickly.”
Some economists cautioned that the uncertainty thrown up by Trump could make the Monetary Policy Committee more wary over further policy moves. The nine-member panel has cut rates three times since August but is taking a “gradual and careful” approach to future cuts.
“We are concerned that maybe the supply chain impacts might actually be greater than some people recognise,” said Andrew Goodwin, chief UK economist at Oxford Economics. “The bar to having a (BOE policy) pause is probably much lower now than it was before.” BLOOMBERG
