BOE preview

BOE preview, as Trump’s tariffs kick in

• Why the BOE can cut rates while inflation is rising
• What comes next
• Why a 3-way split could be dovish
• Trump’s tariffs kick in
• Markets remain sanguine on impact of tariffs
• Apple’s Tim Cook on bended knee to Trump

The Bank of England is jostling with US tariffs to steal the limelight on Thursday. US tariff rates came into force at midnight, and the average US tariff rate is now over 15%, the highest level for a century. This is the backdrop to today’s Bank of England meeting, where the market is convinced that the BOE will cut rates to the lowest level in 2 years.

UK rates set to fall below US rates to blunt some of tariff pain

If the BOE does cut rates to 4%, this will mean that interest rates in the UK will be below US interest rates, which comes at an auspicious time. Lower interest rates could bolster the UK economy as it navigates the new US trade policy. Growth rates are being cut across the globe, but the US could still have a growth advantage. If the UK can capitalize on its lower tariff rates compared to elsewhere, then the UK could also be one of the least effected by the new US trade policy.

A rate cut from the BOE today is considered a done deal, so the market reaction will be driven by the growth and inflation forecasts and signs of where interest rates will go next.

Why BOE can cut rates even though inflation remains elevated

Looking at inflation and growth forecasts first, the BOE is expected to raise their inflation forecast, which could top 4% in the coming months. Growth is expected to be lowered, which raises the spectre of stagflation. However, we think that the BOE will view the chance of a prolonged period of stagflation as being low. It may seem strange that the BOE is willing to cut interest rates when it is also raising its inflation forecast to well above the 2% target rate. However, there is method to the madness. At least in the short term, we expect the BOE to focus more on growth rather than inflation, which could justify further rate cuts later this year. Currently the market expects just under one more cut for the end of this year; however, the outlook is uncertain.

Added to this, the BOE could also justify cutting rates even with high inflation, due to the delay in rate cuts passing through to the real economy. Monetary policy can take many months to pass through to the real economy, so the BOE can justify cutting rates now, if its forecasts show that inflation is expected to fall back to target in the coming years.

Mixed messages from the BOE

To ensure that the BOE maintains its credibility, the BOE may continue to insist that their rate cutting cycle will be gradual. However, today’s meeting is expected to show divisions at the BOE. There could be a 3-way split today, with 5 members voting for a 25bp rate cut, 2 members voting for a 50bp rate cut, and 2 members voting for no cut. We think that a 3-way split, including two members voting for a 50bp cut is a dovish development.

BOE economists are also split on how the Bank should proceed with rate cuts. Some think that the BOE needs to cut rates at a much faster pace to support a rapidly slowing  economy. Currently the interest rate futures market sees UK rates falling to 3.4% in the next 12 months, some argue that rates need to fall well below 3% to support the economy. However, others think that the risks are tilted to a hawkish surprise at today’s meeting, as the Bank preps the market as it nears the end of its rate cutting cycle.

What’s next?

A 3-way split also makes it harder to determine where rates will  go next. However, the BOE may want to say less rather than more in the current environment. The Chancellor is expected to impose hefty tax rises on the public in the October budget to meet a reported £50bn black hole in the UK’s finances. This is to fund the government’s spending pledges that it announced in June. Considering the government has all but ruled out cutting spending for fear of offending backbench Labour MPs, then tax rises may be the only option open to the Chancellor. Due to this, the BOE may need to cut rates by more than is currently expected, although we do not expect them to signal that this is a possibility until later this year.

The market impact

Instead, the Bank could signal that it is shifting to a dovish direction by focusing on the cracks in the labour market. If it does this, then the pound could come under pressure. The pound has been one of the top performers in the G10 FX space so far this month, although it is middle of the pack on a YTD basis, and GBP/USD is higher by more than 6% so far in 2025.

European stocks opened higher on Thursday, although the FTSE 100 is lower as the biggest UK firms that have dollar earnings are weighing on the index as the dollar comes under pressure today. Overall, risk appetite remains buoyant in the face of a raft of US tariffs coming into force from today. Investors have been rewarded so far for not getting too excited about tariffs, and we will need to see if this continues to pay off.

Trump takes a bite out of Apple’s spending plans

Apple shares propped up the US market on Wednesday, after the CEO Tim Cook announced another $100bn of investment in the US, which adds to the previously pledged $500bn of investments Apple has promised to make. This includes a smart glass production line in Kentucky. Apple is committed to making more of its parts in the US, to avoid US tariffs. This is good politics, since tariffs cost Apple $800mn in Q2. To find further favour, Cook presented Trump with a glass ornament, to congratulate him on his second presidency. The market liked Cook’s posturing to Trump, and the Apple share price jumped by 5% on Wednesday. Apple has been a laggard in the Magnificent 7 so far this year, and its share price is lower by 14% YTD. Now that it can avoid punitive tax rates on chips and other tech products, this could be the time for the share price to shine.