Why Britain is cutting interest rates – and the US isn’t

Interest rates have been cut to 4.25 per cent. The Bank of England’s Monetary Policy Committee (MPC) voted by five to four for what will be the fourth rate reduction since August. The decision breaks with the direction of the US Federal Reserve, which held rates yesterday after refusing to bow to pressure from President Donald Trump who wants to see rates cut. Jerome Powell, the Fed’s chairman, said America’s economy was ‘highly uncertain’ making it difficult to push ahead with a rate reduction.

Back home, analysts are now anticipating the sharpest fall in the cost of borrowing since the financial crisis. Already mortgage rates have been tumbling, with the average five-year fixed deal at 5.08 per cent and the average two-year fix at 5.14 per cent. At the start of the year, both rates were closer to 5.5 per cent. On the flipside, savers will be less happy as the rates available on easy access savings accounts and ISAs fall too.

The cut indicates a switch in priorities for the nine member MPC. Worries about stagnant growth as a result of Trump’s tariff turmoil outweigh the committee’s fears about the stickiness of inflation – particularly in wage growth. The hope, of course, will be that less favourable terms for savers will encourage Brits to spend their money and contribute to economic growth. The MPC see inflation peaking at 3.5 per cent next quarter and expect it to ‘fallback thereafter’.

Markets and economists were anticipating two more cuts this year, though that expectation changed over the last few weeks because of the widely-held view that, in Britain at least, the effects of Trump’s tariffs would be deflationary in a way that hampers growth. If the US-UK trade deal that is set to be outlined in the White House this afternoon negates those concerns, we may see the MPC return to the focus they had at the start of the year with a much more cautious trajectory on cuts.

The government will hope that a trade deal will free Britain from the worst effects of the tariff war and boost our chances of growth. But independent forecasters are still doubtful about the country's economic future. The National Institute of Economic and Social Research warned this morning that the UK faces lower growth and higher inflation and that Chancellor Rachel Reeves’s fiscal rules are unlikely to be met. But if the trade deal is substantial and the rate cuts continue, Keir Starmer and Reeves will be breathing sighs of relief.