Asset managers have broadly welcomed a decision by the Bank of England today to cut interest rates by a quarter point to 4.25% amid threats of a trade war with the US.
The widely-expected move from the Bank’s monetary policy committee warned that the UK economy would slow by a further 0.3% over the next two years.
Economic growth “is judged to have slowed and is expected to remain subdued in the near term”, the Bank said in a statement.
David Katimbo-Mugwanya, Head of Fixed Income, EdenTree Investment Management, said: “Having maintained relatively tight monetary policy settings that were well clear of the current rate of inflation – which is now projected to decline – there was ample room for the Bank of England to reduce interest rates ahead of today’s announcement – arguably more than they chose to take advantage of.
“Looking forward, the prevailing perception that disruptions to global trade could prove disinflationary for the UK economy solidifies the case for further cuts in short order, as policymakers look to mitigate the expected consequences of this disruption, notably to growth and employment.”
Michael Metcalfe, Head of Macro Strategy, State Street Markets, said: “As a slow growing open economy with a large current account deficit, the UK is especially vulnerable to further shocks to global trade.
“The BoE’s cut today is attempting to get ahead of the potential downside risks to growth, but with two MPC members dissenting and coming, as it does, at a time when hopes of a trade deal with the US are rising, any negative impact on Sterling should be modest.
“Meanwhile the fact the committee was content to keep quantitative tightening at its current pace reinforces the message they are unperturbed by the recent volatility in long-dated bond yields.”
Meanwhile, Mercer’s European Head of Economics and Dynamic Asset Allocation, said: “The Bank’s Monetary Policy Committee faces a tricky balancing act with inflation and wages still elevated. Global trade issues are likely to put downward pressure on both growth and inflation. We expect the Bank to keep cutting rates, reaching 3.5% or lower by 2026, as price and wage inflation moderate further.”
Simon Dangoor, Head of Fixed Income Macro Strategies at Goldman Sachs Asset Management, said: “Amid ongoing global trade tensions and softer inflation pressures, the Bank of England delivered the well-anticipated 0.25% cut while maintaining its “gradual” easing approach, mindful of inflation persistence and weak aggregate supply.
“Despite this caution, the Bank highlighted downside risks to growth. We expect three more rate cuts this year and see risk that the Bank could accelerate its easing pace, potentially reaching a 3% terminal rate if economic headwinds intensity and inflation proves less persistent than feared.”
Neil Birrell, Chief Investment Officer, Premier Miton Investors, said: “An interest rate cut would normally be the main headline of the financial day, but a trade deal with the US is expected and that will be the focus. As the rate cut was all but known, attention was around policy guidance and that’s tricky at a time of such uncertainty.
“However, the big news is that it was a close vote. 5 voting in favour of 0.25%, 2 for no change and 2 for 0.5%. That really goes to show the scale of the uncertainty that exists amongst a key group, namely the actual setters of policy. It’s going to be difficult to make a call on future policy on the back of that.”
Luke Bartholomew, Deputy Chief Economist, at Aberdeen said: “No surprises in the Bank’s decision to cut interest rates by 25bps. But the Monetary Policy Committee is clearly very divided on how policy should respond to the many shocks currently hitting the economy, with a three-way split in the voting pattern.
“This is highly unusual and will make it hard for the Bank to send a clear signal to the market about the likely path of policy. But with the Bank maintaining its guidance that further cuts will be “gradual and careful”, the chance of another cut in June probably have fallen significantly.”
“We still think the Bank will cut rates at least twice more later this year, but much like the Fed’s message yesterday, UK policy makers will want to see more data on how tariffs and domestic tax increases are being digested by the economy before moving decisively. Bailey may face questions about the UK-US trade deal, but its impact on monetary policy is likely to be relatively modest, even if it may help to further support risk sentiment.”
George Brown, Senior Economist, Schroders said: “Today’s decision came as no surprise to anyone. But going forward, the Bank of England has far less scope to cut rates than the market currently expects.
“While Trump’s tariffs will provide some marginal relief through lower goods prices, the fundamental issue for the UK is that it continues to face considerable capacity constraints. As such, inflation looks set to rise again later this year as a result of disappointing productivity and sticky wage growth. To our minds, this is consistent with the Bank only taking interest rates as low as around 4% this rate-cutting cycle.”
