Economists have said there could be three base rate cuts this year as a result of Trump’s tariffs, which could also bring down mortgage rates
UK interest rates could fall faster than previously expected as a result of Donald Trump’s tariff blitz, economists have said.
In a speech on Wednesday, the US President announced he would impose trade taxes on more than 180 countries and territories, including the UK.
These tariffs will make it more expensive for goods to be sent to the US, which will hit businesses’ profits and hit the economy, as it could lead to some businesses cutting back on employees.
Though the Bank of England primarily cuts interest rates to limit inflation, it also tends to be more likely to make reductions when the economy is struggling, as higher rates make borrowing more expensive, which can weigh down even further on economic growth.
An increase in the expected speed of interest rate cuts can also lead to mortgage lenders slashing rates for their customers, which experts say they now expect could happen in the next few weeks.
Previously, it was forecast that the Bank of England would cut rates twice more this year, from their current level of 4.5 per cent, but experts now think it could the base rate could be cut three times, and financial markets have become more confident the next cut will come April.
Any extra cut would be a rare bit of good news for the Chancellor Rachel Reeves, particularly if it led to cheaper mortgages.
Putting more money in people’s pockets is a key promise of Labour and an extra cut would allow Reeves to argue this was the case.
But the impact of tariffs also threaten to result higher taxes and higher prices on some goods, which would possibly wipe out the effect in pockets of an extra interest rates cut.
Paul Dales, chief economist at Capital Economics, said: “I think it is fair to say that the extra downside risks to economic growth caused by Trump’s tariffs may make the Bank more inclined to cut interest rates three times this year.”
The UK has been hit with a 10 per cent tariff on all of its goods being brought into the US, which Trump says is a retaliation to UK tariffs on American goods.
Thomas Pugh, economist at consulting firm RSM UK, said: “The direct impact on the UK is likely to be [down] in the 0.2 to 0.5 per cent of GDP range over the next few years combining both the impact of the 10 per cent flat tariff and the 25 per cent tariff on automotives.”
GDP – gross domestic product – is a measure of all the economic activity of companies, governments and people in a country. When GDP is falling, it means the economy is shrinking.
Pugh added: “The impact will be bigger once the hit to the US and European economies becomes clearer and is taken into account.
“Given we expect growth of 1 per cent this year and 1.5 per cent next year, it implies another year of stagnation at best. This reduction in growth will probably make the Bank of England more likely to cut interest rates this year, so we anticipate three more 25 basis point cuts in 2025.”
The Office for Budget Responsibility (OBR) estimates a worst-case scenario trade war could reduce UK economic growth by 1 per cent and wipe out the £9.9bn of fiscal headroom Chancellor Rachel Reeves gave herself at last week’s Spring Statement.
Rob Wood of Pantheon Macroeconomics said: “Surging uncertainty ahead of President Trump’s tax salvo had already been weighing on growth and the UK got away relatively lightly with a 10 per cent tariff, which we reckon would shave about 0.1 per cent off GDP.”
Traders increased their bets on Thursday for a base cut from two cuts to two and a half. The next Monetary Policy Committee (MPC) meeting is due in May and it is expected there will be a 25 basis point cut then.
Responding to this, Wood said: “We think markets were right to have priced in marginally faster easing [of interest rates].
This is assuming a slightly lower demand for goods in the US once prices have risen in response to tariffs.
It comes after the Labour Party promised in its manifesto to boost growth – yet the latest figures show the UK economy actually contracted by 0.1 per cent in January.
Reeves blamed global economic uncertainty for the downturn – with the news of widespread tariffs now even more concerning for the UK economy.
Chris Southworth, Secretary General of the International Chamber of Commerce United Kingdom, added: “These US tariffs definitely threaten our national economy, coming at a time when we desperately need growth. This is not helping us at all.
“We’re talking about 300 billion pounds of trade with the US, that’s 30 per cent of our total trade and trade overall is 60 per cent of our economy. So this will have a significant impact.”
Economists at the Bank of England have suggested the full effects of the tariffs will depend on how other countries respond with their own trade policies – as well as how foreign exchange rates are impacted.
There is also the possibility that the opposite could happen and interest rates rise if prices are pushed up for long enough to affect the rate of inflation.
Impact on mortgage rates
If there is an increase to how many base rate cuts financial markets expect, it can effect Swap rates, which are the key metric mortgage lenders use to decide what level to set their rates at.
Swap rates have already fallen since the tariff announcement, and lenders say this could lead to mortgage reductions in the coming days and weeks.
Peter Stimson, head of product at MPowered Mortgages, said: “Unsurprisingly, markets have reacted negatively to the president’s ‘liberation day’ in particular the swaps markets, which lenders base fixed rate mortgages on. These have fallen over 10 basis points early this morning due to fears of slowing global trade and a possible recession and over 25 basis points in the last week.
“Falling swap rates, will, in the short-term lead to cheaper mortgage rates. We could potentially see rate cuts as much as 20 basis points for fixed rate borrowers in the coming week. Watch this space.”
Aaron Strutt of brokers Trinity Financial said: “As we have seen many times before mortgage rates can change pretty quickly when there is economic uncertainty and the money markets get spooked.
“With so many borrowers opting for two year fixes rather than longer term fixes there is clearly a consensus that rates will get cheaper soon. The Bank’s MPC know they will need to do something to make the cost of borrowing cheaper if Trump’s tariffs start to hit our economy.”
Nick Mendes of brokers John Charcol added: “Mortgage rates are likely to fall if markets continue to expect further cuts over the next couple of years. That would be welcome news for borrowers, particularly those trying to get on the housing ladder.
“While there is some potential for rates to fall, much will depend on how the broader economic picture develops over the coming months.”
The average two year fixed mortgage rate is 5.33 per cent and the average five year is 5.18 per cent. However, there are cheaper rates available for both fixes.