The chances of a rate cut next month slipped after the US stepped back from its tariff chaos, while a Bank of England governor warned that weeks of disruption is likely to damage UK growth.
Money market bets on a rate cut, from 4.5% to 4.25%, are running at a 78% chance, with a 22% possibility that BoE policymakers leave rates on hold.
Earlier this week, a base rate reduction was priced at over a 90% chance, with a small possibility that the Bank slashed rates by a half-point to 4%, to shore up the UK’s fragile economy.
The move comes after US President Trump stepped back from the brink of a global trade war yesterday, saying he would put a 90-day pause on plans to impose sweeping “reciprocal” tariffs against more than 60 countries around the world.
Baseline tariffs of 10% on most nations, including the UK, remain.
The US has set a 125% import tax on China, after it set an 84% charge on American goods.
Trump says he will use the next three months to begin trade negotiations with scores of countries.
Global markets surged once it was clear that a trade war, for now, had been averted, which was expected to push up prices and may have tipped the world into recession.
AJ Bell investment director Russ Mould says: “If you felt a bit of a breeze around 6.30pm UK time last night it was probably the cumulative effect of countless global investors breathing a massive sigh of relief.”
Mould adds: “News that the particularly punishing ‘reciprocal’ tariffs introduced by the Trump administration would be put on hold saw substantial gains in the US and across Asia and that pattern is being repeated in Europe this morning.”
But markets remain uneasy about current US trade policy and the damage that has already been caused.
Bank of England deputy governor Sarah Breeden (pictured) warned that the effect of America’s moves on tariffs is likely to lower UK growth.
“Expenditure switching by US consumers away from UK goods, combined with weaker global demand due to potential counter tariffs and supply chain disruptions would be expected to weigh on UK activity,” Breeden told at an MNI Livestreamed Connect event.
Breeden, who is also a member of the Monetary Policy Committee, adds: “The impact on inflation, however, is not that clear cut.”
Deutsche Bank senior economist Sanjay Raja says that UK rate-setters face “a dilemma,” in a note to clients.
Raja points out: “The growth effects from the tariff shock will be unambiguously negative – no matter the size. But its inflation effects remain ambiguous – at least for now.
“A rupture in global supply chains combined with higher global prices given any retaliation, could see goods inflation soar.
Raja adds: “Equally, a redirection of goods trade from Asia into Europe could put meaningful downward pressure on prices.
“The Monetary Policy Committee, we think, will have little clarity on the direction of inflation by its May decision – and as such will likely err on the side of caution with a quarter-point rate cut.”
