The Bank of England cut interest rates by 25 basis points as scheduled, but the voting lineup unexpectedly split into three factions.

On Thursday local time, the Bank of England (BoE) announced a 25 basis point interest rate cut, reducing the benchmark interest rate from 4.5% to 4.25%. This marked the fourth rate cut in the current easing cycle, in line with market expectations.

The Monetary Policy Committee (MPC) approved the interest rate decision with a 5-4 vote. Five members supported a 25 basis point cut, two members advocated for a more significant cut (50 basis points), and two other members voted to maintain the key interest rate unchanged.

The split voting lineup, with three factions, highlighted the chaos caused by US trade policies. MPC members Dhingra and Taylor voted in favor of a 50 basis point cut, arguing that the BoE needed to act swiftly to support the economy and ensure inflation does not fall below the target level.

Given the uncertainties brought to the UK economy by Trump's across-the-board tariff impositions, BoE policymakers adhered to their guidelines that monetary easing should continue to be "gradual and cautious."

BoE Governor Bailey stated, "Inflationary pressures continue to ease, allowing us to cut interest rates again today. However, the past few weeks have shown how unpredictable the global economy's trajectory can be. That's why we need to stick to a gradual and cautious approach."

This decision demonstrated a tougher stance than expected, with the British pound initially diving against the US dollar before surging again. Reports also indicated that the UK is preparing to reach a trade deal with the US, which has supported the pound.

Despite the prospect of a trade deal, the BoE made it clear that the impact of US tariff policies on the UK economy is real and will persist for some time. Due to rising costs and increased uncertainty, the shock to economic activity will reduce UK output by 0.3 percentage points over three years and lower inflation by 0.2 percentage points over two years.

The BoE revised its economic growth forecast for 2025 upward to 1% (from a February forecast of 0.75%), slightly lowered its forecast for 2026 to 1.25% (from a February forecast of 1.5%), and maintained its 2027 forecast at 1.5%.

Regarding inflation, the BoE currently expects inflation to peak at 3.5% in Q3 this year, down from a previous forecast of 3.7%, primarily due to falling energy prices. The inflation rate is expected to reach the 2% target by Q1 2027.

Expectations for further rate cuts decline

The BoE also presented two scenarios: one where goods supply may weaken, and domestic wages and prices in the UK may continue to rise; and another where inflationary pressures may ease more quickly due to greater or more prolonged weakness in demand relative to supply.

The day before, the US Fed remained on hold. Fed Chairman Powell, who is often criticized by Trump, made it clear that the central bank would not rush to ease monetary policy until there was greater certainty about the direction of trade policy.

Philip Shaw, chief economist at Investec, said that the Bank of England's interest rate cut was not surprising, but the fact that two members, including chief economist Huw Pill, preferred to keep interest rates unchanged reduced the likelihood of another rate cut at next month's meeting.

Luke Bartholomew, an economist at Aberdeen, said that it was highly unusual for the Monetary Policy Committee (MPC) to be divided over Trump's tariffs, which would make it difficult for the Bank of England to send a clear signal to the market about the possible policy path. However, as the central bank maintained its guidance that further rate cuts would be gradual and prudent, the likelihood of another rate cut in June had significantly decreased.

Julius Bendikas, head of European economics and dynamic asset allocation at Mercer Consulting, commented: "The Bank of England's MPC faces a tricky balancing act, with inflation and wage levels remaining high, but global trade issues likely to exert downward pressure on economic growth and inflation. We expect that as price and wage inflation slow further, the Bank of England will continue to cut interest rates, reducing them to 3.5% or lower by 2026."