Tariffs Force Bank of England to Consider Faster Pace of Cuts

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The overwhelming majority of economists surveyed by Bloomberg now expect the BOE will downgrade growth for next year in its forecasts accompanying Thursday’s rate decision.

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“The rise in US tariffs and heightened trade policy uncertainty are mainly an adverse demand shock, which will reduce growth and inflation,” former BOE ratesetter Michael Saunders, now senior adviser at Oxford Economics, wrote on April 29. That makes next week’s decision easier for the MPC than the Fed, where “tariffs are an adverse supply shock, which reduces growth and lifts inflation” and policymakers will need to balance the trade-off.

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Saunders believes the BOE will take a “least regrets” approach by “bringing forward the easing that was previously envisaged.” Barclays’ Meaning, a former BOE economist, also thinks there is a strong chance the Bank will cut faster.

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“I think they will almost definitely say the balance of risks has shifted, so there is a good chance they will tweak the guidance to tee up sequential rate cuts,” he said. “This will open the door to a June cut without explicitly referencing it, to retain optionality.”

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Gradual and careful

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To confirm the new easing bias, a change to the BOE’s guidance of “gradual and careful” cuts is possible, with both Saunders and Meaning saying “gradual” could be dropped. 

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The vote split may also be a signaling mechanism. All nine committee members are expected to vote for a cut on Thursday, the second this year, but Bloomberg Economics chief UK economist Dan Hanson is one of several who believe external MPC member Swati Dhingra may dissent by calling for a larger half point reduction.

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Deputy Governor Dave Ramsden and external member Alan Taylor may join her, Nomura economist George Buckley said, reinforcing the dovish shift. “We could see more dissenters voting for a 50 basis point cut, which would increase the likelihood of a follow-up 25 point cut in June,” he added.

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Trump’s trade wars have complicated the BOE’s task by making the macroeconomic backdrop so unstable. To deal with the uncertainty and help communication, the Bank is likely to make greater use of scenarios in the new forecasts published alongside the rate decision.

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Meaning said the BOE might replace its three “cases,” which reflect different paths for inflation, with three tariff scenarios, each with more complete forecasts. He said that, alongside a central scenario, it would be useful to have one incorporating trade retaliation and one in which the White House retreats. “Markets and MPC members could then put probability weights on the three scenarios,” he said.

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One former policy maker, Jonathan Haskel, an external member of the MPC between 2018 and 2024, urged the BOE to be cautious, telling the Times on Monday it was hard to see the US and China reaching a deal to substantially lower tariffs.

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Trump’s fingerprints will be all over the Bank’s new economic outlook, either way. Hanson expects the BOE to upgrade growth in 2025 a touch to 0.8% from 0.7% in its February outlook, due to the stronger start to the year than expected, but follow that with a downgrade to 1% from 1.5% for 2026, when “the impact of tariffs will be most evident.” 

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The forecasts for inflation and lower market borrowing costs will imply that the BOE should cut rates to at least 3.75% by the end of the year, he added.

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Fed chair Powell’s decision to quote Ferris Bueller may have been a subtle critique of Trump. In one scene, the economics teacher tells his class that the Smoot-Hawley tariffs of the 1930s backfired. The day after Powell’s reference, Trump mused about firing him. 

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