What is the BoE’s next move?

The Bank of England cut rates from 4.5% to 4.25% at its latest monetary policy meeting amid a backdrop of lackluster economic growth and uncertainty around President Donald Trump’s trade tariffs.

Many analysts and financial organizations have long been on the side of the Bank being more aggressive with its policy easing. At the start of the year, for instance, the Standard Bank anticipated a total of 150-bps in rate cuts this year to take the base rate down to 3.25%. At the time, the market was priced for rates to come down a much more modest 75-bps to 4%. Even with an assumed base rate of around 3.5% at year end, the market could still be underplaying the extent to which the Bank cuts.

Clearly, the Bank of England does not have to get the base rate below 3.5% this year; 25-bps cuts at most of the remaining meetings will do the trick. Nonetheless, there is something special about today’s meeting that hints that if the Bank is going to opt for a larger rate cut this year, it is not later in 2025.

One clear reason for this is the impact from higher US tariffs. BoE members initially wondered whether these might lift inflation, but, thankfully, they seem to have ditched this idea in favor of the view that both growth and inflation will be lower. The UK is a very open economy and could be impacted significantly by US tariffs. Of course, it is true that the UK only has a very small trade surplus in goods with the US. However, some 27% of UK car exports go to the US and will be hit hard by the 25% tariff.

In addition, the UK had a services surplus of some GBP75bn with the US in 2024 and this surplus could be significantly reduced by factors such as a decline in dealmaking as a result of tariff-related uncertainty. On top of some weakness in external demand, internal demand is being sapped by the recent business tax increases from April, that stemmed from the October budget. And since the Bank last made its economic forecasts in February there has been a spring statement from the government that will further tighten the fiscal screw. Yet another factor to consider is that financial conditions have been tightened by sterling’s sharp rise against the US dollar—and on a trade-weighted basis.

So, what might hold the Bank back? The most obvious answer is that members fear that weakness in economic growth is not a function of weak demand as much as a symptom of constrained supply. The former lends itself to lower inflation and lower base rates; the latter could mean higher inflation and more stable base rates. But the problem here is that the Bank is flying a bit blind because much of the alleged supply tightness comes from the labor market. Wage growth of close to 6% does, indeed, suggest that the labor market is still tight and that big rate cuts now would be playing fast and loose with inflation. But the labor market data is famously unreliable.

“We think that the Bank should take more of a leaf out of the ECB’s book and look at indicators of future wage settlements. Here the UK outlook seems far more encouraging. Accountants Deloitte, for instance, questioned CFOs a few weeks ago and found that they see awards of around 3% this year. Other surveys appear to us to be consistent with wage growth that’s around half of the growth that we have seen in official average earnings data over the past year”, said the Standard Bank.