By Andy Bruce
LONDON (Reuters) – Bank of England Governor Andrew Bailey stuck to his script outlining gradual interest rate cuts on Thursday, but Donald Trump’s White House return and threats to impose tariffs could force a hasty rewrite, economists said.
The BoE’s Monetary Policy Committee (MPC) voted to cut interest rates to 4.75% from 5.0%, the second reduction this year. Bailey said borrowing costs should continue falling, so long as the economy evolved in line with expectations.
Trump’s decisive election victory clouds the BoE’s assumptions, which were formulated well in advance of the U.S. vote and published a day after the result became clear.
The National Institute of Economic and Social Research (NIESR) think tank said Britain’s already slow economic growth rate could be more than halved by Trump’s proposal to impose tariffs of 10% or more on all goods imported into the United States.
The BoE would probably have to raise interest rates to counter a rise in prices caused by higher U.S. tariffs, NIESR’s principal economist, Ahmet Kaya, said.
Bailey rebuffed questions from journalists on Thursday about how Trump’s policies would shift the outlook for BoE interest rates.
But he said it was something the BoE would monitor closely.
“There are a lot of risks attached to the fragmentation of the world economy… let’s see what happens. It’s too early to judge,” Bailey told reporters.
Hetal Mehta, head of economic research at wealth advice company St James’s Place, said the U.S. election would affect the BoE rate outlook, even if Britain was less directly in the firing line of Trump’s tariff threats than other countries.
“Trump has traditionally looked at countries with trade surpluses as those who are currency manipulators, and the UK doesn’t fall into that category,” Mehta said.
Thanks to methodological differences between their national statistics agencies, Britain and the United States both report trade surpluses with each other.
The budget plans of UK Prime Minister Keir Starmer’s new Labour government, announced last week, including big increases to tax, spending and borrowing, added to doubt about the BoE’s intention to cut rates gradually.
While the BoE said the budget would boost inflation and economic growth, it omitted the financial market reaction to those plans from its analysis.
The sharp rise in market interest rates that took place in the budget’s aftermath is likely to restrain inflation and economic growth somewhat.
Financial markets currently price in between two and three BoE rate cuts in 2025, compared with nearly four before the Oct. 30 budget announcement.
“The MPC is now dealing with two new inflation shocks: Mr Trump and the budget,” said Rob Wood, chief UK economist at consultancy Pantheon Economics.
(Reporting by Andy Bruce; Editing by Susan Fenton)
