BOE Cuts Interest Rates As UK Confronts Economic Doubt, Election 'Revolution'

The Bank of England (BOE) cut interest rates on Thursday as the United Kingdom struggles with economic uncertainty abroad and political disruption at home.

The central bank reduced its key interest rate from 4.5% to 4.25% at its latest monetary policy meeting, citing substantial progress on disinflation. Underlying UK GDP has slowed since the middle of 2024, and the labour market “has continued to loosen,” it said.

“Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the US,” the central bank said. “Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller.”

The BOE Monetary Policy Committee “judges that the risks around GDP growth in this forecast are somewhat to the downside.” The Chancellor of the Exchequer, Rachel Reeves, said in late March that the economy would grow just 1% this year, down from the previous forecast of 2%.

It will be the first with a country whose imports were subject to new tariffs imposed by Trump in early April. Trump did not announce further details.

Bank of England Rate Cut In Line with Consensus

Five of the BOE’s nine policymakers voted for the cut, with two members wanting a larger 50 basis-point reduction, and two wanting to keep rates on hold. The cut was in line with the consensus, with inflation slowing to 2.6% in the twelve months to March, from 2.8% the previous month.

Investors, though, had looked for signals the BOE would pivot from its “previous script” that future cuts would be “gradual and careful,” ING Think said. Ahead of the decision, the market had priced in two further cuts at the following three meetings.

“Changing that language would have heavily implied the Bank was prepared to cut rates again in June, something we suspect it’s reluctant to do – or at least, pre-commit to at this stage,” ING Think said.

“We still think the path of least resistance is for the Bank to keep cutting rates once per quarter this year, which would see its next move in August.”

The British pound declined 0.4% against the US Dollar on the news, before paring losses on a Friday morning. The pound is up against the dollar by around 6.2% year-to-date.

Bank of England Rate Cut May Ease Economic Frustration

The rate cut may help ease some of the economic frustration many British households and firms feel by making borrowing money less expensive. Consumer confidence in April fell to the lowest level in a year, according to market research firm GfK.

The GfK Consumer Confidence Index fell to -23 in April from -19 in March. A Reuters poll of economists had pointed to a reading of -22.

“Consumers have not only been grappling with multiple April cost increases in the form of utilities, council tax, stamp duty, and road tax,” Neil Bellamy, consumer insights director at GfK, said. “They are also hearing dire warnings of renewed high inflation on the back of the Trump tariffs.”

Businesses hope that lower rates will boost consumer confidence and spending, CNBC reported. The Labour government has hit the UK’s 5.5 million small and medium-sized enterprises with a rise in the national minimum wage and higher National Insurance contributions.

Reform UK Beats Labour in Local Elections, Wins Most Seats

The lower rates may also slow the political gains being made by Reform UK, a right-leaning, anti-immigration party led by Nigel Farage. The party won the most seats of any party in the May local elections, 677 out of some 1,650.

“We’ve dug very deep into the Labour vote and, in other parts of England, we’ve dug deep into the Conservative vote,” Farage said. “There’s no question, in most of the country we are now the main opposition party to this government.”

Reform UK clinched majority control in ten councils, gaining representation across all 23 councils in the elections. Reform UK claimed the Runcorn and Helsby by-election, seizing the Labour Party’s safest constituency in the 2024 general election by six votes.

The Conservatives and Labour were the biggest losers, the New York Times reported. The two parties, which have dominated British politics for decades, lost municipal seats to the centrist Liberal Democrats and the left-wing Green Party as well.

Reform UK has edged ahead of Labour regarding voter confidence, according to Ipsos polling. Respondents trusted Farage’s party to govern the country at 35%, compared to 33% for Labour.

“The entire political system is now changing shape in profound and perhaps permanent ways,” Matt Goodwin, a British academic, writer, pollster, and campaigner, wrote on Thursday. “We are, in short, witnessing a full-blown political revolution against the establishment.”

Farage Attacks UK Trade Deal With India

Farage also attacked the Labour Party’s May 6 trade deal with India, saying it undermines British workers. The British government branded the post-Brexit agreement “a new era for trade and the economy.”

The deal exempts Indian workers from paying national insurance for three years. This policy makes it up to 20% cheaper to employ them compared to British workers, who face a tax hike of £1,000 per employee, according to Farage.

He also accused Labour of refusing to understand why so many voted for Reform UK and predicted that Prime Minister Keir Starmer’s ratings would plummet even further.

The “new trade deal with India has sold out British workers to the highest degree,” Farage said.

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