
BoE and ECB cut interest rates amid tariff related growth concerns
Summary
The Bank of England (BoE) cut interest rates by 25 basis points today, citing concerns over Donald Trump’s tariff policies on economic growth. However, the bank’s Monetary Policy Committee (MPC) was unexpectedly split three-ways in its decision as it faces the more unpredictable macro environment. This was the fourth reduction in borrowing costs since the bank began lowering rates last August, taking the rate to 4.25%.
At their meeting last month, the European Central Bank (ECB) also reduced its key interest rates by 25 basis points, lowering the deposit facility rate to 2.25%. However, the bank’s Governing Council was unanimous in its decision, reflecting the ECB's rising concerns over economic uncertainties – particularly stemming from U.S. tariffs – and increased disinflationary forces, such as the stronger euro.
The dovish tone of the press conference was in stark contrast to their March meeting, where they described their monetary policy stance as “becoming meaningfully less restrictive,” suggesting further rate cuts are being considered.
Bank of England
Today’s quarter-point rate cut by the BoE, which followed Donald Trump’s Liberation Day tariffs and had been expected by the market, sparked a significant market sell-off. It also prompted economists to slash global growth forecasts and price in faster monetary easing. There were two members who voted for a 50 basis point cut, highlighting the range of views on both the U.K. inflation and economic landscape, as well as potential impact from tariffs.
In its accompanying statement, the BoE said it thought the increase in tariffs by the U.S. and other countries would weigh on U.K. economic growth but positively impact inflation, while also emphasizing the uncertainty of the outlook. The BoE now expects inflation to peak at 3.5% this year (vs. 3.7% previously) and to drop back to its 2.0% target early in 2027, nine months earlier than forecast in February.
BoE Governor Andrew Bailey repeated their previous guidance, saying, "the past few weeks have shown how unpredictable the global economy can be. That's why we need to stick to a gradual and careful approach to further rate cuts."
The MPC’s insistence that it would retain “a gradual and careful approach” to further rate reductions drove the GBP higher across the board, as traders trimmed bets for rate cuts at the remaining five BoE meetings this year.

European Central Bank
The ECB's seventh rate cut brings the deposit facility rate to 2.25% and the main refinancing operations rate to 2.40%. These are the lowest levels since the end of 2022 and the ECB made it clear they are considering further easing, as the sharp post-pandemic inflation spike has dissipated, and changes to global trade policies have sapped business confidence and depressed growth expectations in recent months.
ECB President Christine Lagarde said during the press conference that the option of a 50bp cut had been debated today but that the decision to cut by 25bp was unanimously taken. Lagarde also highlighted the “exceptional uncertainty” confronting the economy, while repeating that inflation was on track to come down to the bank’s 2.0% target. The phrase “less restrictive” in regard to monetary policy was dropped from the statement, as the ECB confronts downside risks to economic growth, alongside a highly uncertain trade policy environment.
Market reactions were swift: the euro weakened, and eurozone government bond yields dropped significantly, as traders bet on a follow-up rate cut at their next meeting and up to two further cuts by year-end.

Moving forward
Looking ahead, the BoE's monetary policy trajectory will continue to be influenced by global economic developments, particularly domestic inflation trends. Market participants are pricing in the possibility of two further rate cuts this year, with the UK economy still in a weak growth phase. The central bank's cautious stance reflects its concerns over still heightened wage growth and services price pressures, both of which could retrace amid the darkened macro environment.
The ECB has become increasingly concerned about the impact of weaker growth due to tariffs, with the Eurozone at greater risk from higher rates and more reliant on trade with the U.S. Lower borrowing costs are now seen as necessary to help offset some of the downside risks to growth and to guard against downward price pressures that could result from falling energy prices and goods prices from major exporters such as China.
Disclaimers
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