UK interest rate decision and the US trade tariffs

On Thursday, 6 February 2025, the Bank of England (BoE) announced a cut to interest rates, down to 4.5%.

Andrew Bailey confirmed that the BoE will take a cautious approach to further rate cuts, and implied the markets’ expectations of a more aggressive cutting cycle through 2025 could be overdone.

Alongside the announcement of a rate cut, the BoE said it now expects the UK economy to grow by 0.75% this year, half its November forecast of 1.5%, as well as expecting inflation to rise before falling back.

Bank of England governor Andrew Bailey said the BoE expects GDP growth to be notably weaker in the short term over the next couple of quarters. The Bank said the Chancellor’s decision to increase employers’ national insurance contributions would hit jobs and prices more than expected, increasing the forecasted unemployment to 4.8%, being 0.5% higher than the previous forecast.

Other major news this week saw United States President, Donald Trump spark fear in markets with the threat of trade wars, particularly with Mexico, Canada and China. Tariffs (taxes on imports) would increase the cost of products from the affected countries.

The President’s reasoning behind imposing tariffs is to tackle the US trade deficit, making the country less reliant on importing goods from other countries and encouraging more consumption and jobs back into the US. While most of the tariffs have now been delayed, the situation remains uncertain.

The possible imposition of tariffs on Canada and Mexico, and the actual implementation of a 10% across the board tariff on China, have the potential to increase prices and lower economic growth in the US. However, at the same time the US may see some strength in the dollar, and other areas such as commodities and agricultural products could benefit. The precise impact remains unclear as we do not know exactly how aggressive the proposed tariffs will be, or even how long they will be in place.

As the situation develops, we expect more volatility around markets. Our message to investors remains the same: to keep a long-term view on objectives and continue to approach markets with a well-diversified, globally focused strategy. As such, we are not seeing any short-term changes being made within the portfolio in order to try and tackle the situation, but rather we keep our focus on having a robust, well diversified investment strategy using high quality managers.