8th May 2025 13:52
(Alliance News) - Bank of England Governor Andrew Bailey on Thursday welcomed the prospect of a UK trade agreement with the US, which he believes would help "reduce the level of uncertainty going forward".
Bailey did, however, caution that the UK is an open economy so it is exposed to US trade curbs on other nations.
"I hope it's the first of many," Bailey said on the prospect of a US-UK trade agreement.
US President Donald Trump on Thursday called a forthcoming agreement with Britain "full and comprehensive", after reports the two countries were expected to sign a trade deal. Trump is set to hold a press conference in the Oval Office at a 1000 EDT, 1500 BST, where he is expected to reveal the agreement.
Bailey was speaking after the BoE's Monetary Policy Committee voted 5-4 for the widely expected quarter point cut which takes bank rate to 4.25% from 4.50%.
The vote split was more divided than expected. Two members, Swati Dhingra and Alan Taylor, pressed the case for a larger 50 basis points cut, but two members, Catherine Mann and Huw Pill, preferred to keep rates unchanged.
Most economists had expected all MPC members to support a reduction in rates.
Bailey said the past few weeks showed the "unpredictability" of the global economy.
"We need to stick to gradual and careful approach to further rate cuts," Bailey affirmed.
In a statement, the BoE said the more cautious path of the further withdrawal of monetary policy restraint "remains appropriate".
"Monetary policy is not on a pre-set path. The Committee will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks," the statement said.
Bailey later said the interest rates are not on "auto-pilot" and the global economic backdrop was not certain.
The statement noted uncertainty surrounding global trade policies has intensified and the outlook for global growth weakened. The governor in the press conference said the MPC was not briefed on a possible US-UK trade agreement.
"Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners. There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower. 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 policy decision statement said.
The BoE noted progress on disinflation but expects increases in energy prices to drive up CPI inflation from April onwards, to 3.5% in the third quarter.
Bailey put the expected uptick in the UK inflation rate to energy prices and bills.
The BoE's monetary policy report of economic projections shows it expects the rate of inflation to return to 2.0% in the first-quarter of 2027. For the second of 2027, so two years from now, it sees an inflation rate of 1.9%. In its February MPR, it had an inflation forecast of 2.2% for the second quarter of 2027.
It expects the rate of inflation to hit 3.5% in the third-quarter of this year, its forecast knocked from 3.7%. A year from now, it expects an inflation rate of 2.4%, the forecast knocked from 2.6%.
"There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations. That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining bank rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures," the BoE said.
The BoE added: "The May report sets out two illustrative scenarios. In one scenario, there could be weaker supply and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation. In another scenario, inflationary pressures could ease more quickly owing to greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically."
The BoE upgraded its annual gross domestic product growth outcome for the UK this year to 1.0%, from just under 0.8% previously.
The vote split was a key focus of the meeting.
"At this meeting, five members voted to reduce bank rate to 4.25%. Prior to the latest global developments, most members in this group had judged that this policy decision would be finely balanced between no change in bank rate and a further reduction. Although the current impact of the global trade news should not be overstated, the news was sufficient for those members to judge that a reduction in bank rate was warranted," the BoE said.
"This level of bank rate would still leave the stance of monetary policy sufficiently restrictive to bear down on inflationary pressures, were they to re-intensify. For the other members in this group, even in the absence of the latest global news, the case for a reduction in Bank Rate at this meeting had been fairly clear. Underlying domestic disinflation was progressing as expected and monetary policy restrictiveness was bearing down on activity."
For the duo that pushed for a chunkier cut, they believed a "less restrictive policy path was warranted".
"The most significant contributions to the expected pickup in inflation would come from one-off tax and administered prices and past energy shocks. Incoming wage settlements had so far been close to the Agents’ annual pay survey figure for the end of 2025, and were approaching sustainable rates, while consumer spending remained weak and investment subdued. Along with domestic demand shifts and emerging slack, recent global developments in energy and trade policy pointed to potential downward risks to global growth and world export prices. In the medium term, a continued monetary policy stance that was too restrictive risked inflation deviating from the 2% target on a sustained basis and the opening up of an unduly large output gap," the more dovish members adjudged, according to the BoE policy statement.
The BoE added: "Two members preferred to hold bank rate at 4.5%, recognising that short-end market interest rates had already eased by around 40 basis points since the MPC’s previous meeting. For these members, the labour market was proving more resilient than expected, business surveys signalled continued inflationary pressures, and household expectations of inflation had firmed. All these indicators pointed to continued inflation persistence owing in part to structural rigidities on the supply side of the economy. Holding bank rate unchanged at this meeting would ensure that monetary policy remained sufficiently restrictive to weigh against stubborn inflationary pressures."
The pound traded at USD1.3339 shortly after the press conference concluded, up from below the USD1.33 mark before the decision.
By Eric Cunha, Alliance News news editor
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