Economics
Bank of England’s Bailey says UK can’t avoid U.S. tariff impact
Even if the U.K. is not the “direct recipient” of potential tariffs imposed by the U.S., “it will have an effect,” Bank of England Governor Andrew Bailey said Thursday.
If tariffs are announced, their effect on the global economic growth and inflation would need to be looked at, Bailey told CNBC’s Steve Sedgwick.
“Now I think that in terms of growth in the world economy, if this will lead to a, you know, fragmentation of the world economy, that is not good for growth,” Bailey said. “The impact on inflation is more ambiguous, because it depends upon what other countries do in response, it depends on what the consequences of those actions and reactions are for trade,” he added.
U.S. President Donald Trump has warned that the U.K. could be in line for tariffs, but has also indicated a deal could potentially be struck. Trump last week announced tariffs on goods imported from China, Canada and Mexico, before pausing planned duties on imports from the two latter economies.
Bailey on Thursday also noted that the U.K. “does not have a substantial trade imbalance with the U.S.”
The U.S. was the U.K.’s biggest trading partner in the year to September 2024, accounting for over 17% of total U.K. trade, according to official data.
Depending on which figures you look at, the two countries either have a small trade deficit or surplus. What’s important for Trump, though — who has expressed dissatisfaction when the U.S. exports less to a country than it imports — is the numbers are almost balanced.
Bailey also pointed out that services are a large part of U.K. trade, which classic tariffs do not affect in the same way as other goods.
A ‘gradual’ and ‘careful’ BOE decision
The Bank of England on Thursday cut its benchmark interest rate by 25 basis points to to 4.5%. Seven members out of the nine-strong monetary policy committee (MPC) voted in favor of the cut, while two members voted for a larger 50 basis-point reduction.
After the announcement, Bailey said in a press conference that the MPC expected to be able to cut interest rates further as disinflation progressed, but noted that these decisions would be taken on a meeting-by-meeting basis.
Speaking to CNBC, Bailey described the cut as “careful” and “gradual,” adding that the central bankers were using those words “very deliberately.”
The word “gradual” referred to the disinflation process, while “careful” was a nod toward “risks and uncertainties,” he said.
Such uncertainties, “could lead to us having, frankly, you know, higher inflation, which we will have to deal with. We’re going to have this sort of uptick in inflation.” He added that this inflation is unlikely to persist.
The BOE on Thursday also halved its growth expectation for the U.K. for 2025, from 1.5% to 0.75%.
The economy flatlined in the third quarter, according to data released in December, while the latest monthly GDP reading showed the economy expanded just 0.1% in November, after shrinking by 0.1% in October.
— CNBC’s Chloe Taylor and Holly Ellyatt contributed to this report.
Bank of England Governor Andrew Bailey attends the central bank’s Monetary Policy Report press conference at the Bank of England, in the City of London, on May 8, 2025.
Carlos Jasso | Afp | Getty Images
Bank of England Governor Andrew Bailey told CNBC on Thursday that the U.K. was heading for more economic uncertainty, despite the country being the first to strike a trade agreement with the U.S. under President Donald Trump’s controversial tariff regime.
“The tariff and trade situation has injected more uncertainty into the situation… There’s more uncertainty now than there was in the past,” Bailey told CNBC in an interview.
“A U.K.-U.S. trade agreement is very welcome in that sense, very welcome. But the U.K. is a very open economy,” he continued.
That means that the impact from tariffs on the U.K. economy comes not just from its own trade relationship with Washington, but also from those of the U.S. and the rest of the world, he said.
“I hope that what we’re seeing on the U.K.-U.S. trade side will be the first of many, and it will be repeated by a whole series of trade agreements, but we have to see that happen of course, and where it actually ends up.”
“Because, of course, we are looking at tariff levels that are probably higher than they were beforehand.”
In Bank of England’s Monetary Policy Report released Thursday, the word “uncertainty” was used 41 times across its 97 pages, up from 36 times in February, according to a CNBC tally.
The U.K. central bank cut interest rates by a quarter percentage point on Thursday, taking its key rate to 4.25%. The decision was highly divided among the seven members of its Monetary Policy Committee, with five voting for the 25 basis point cut, two voting to hold rates and two voting to reduce by a larger 50 basis points.
Bailey said that while some analysts had perceived the rate decision as more hawkish than expected — in other words, leaning toward holding rates elevated than slashing them rapidly — he was not surprised by the close vote.
“What it reflects is that there are two sides, there are risks on both sides here,” he told CNBC.
“We could get a much more severe weakness of demand than we were expecting, that could then pass through to a weaker outlook for inflation than we were expecting.”
“There’s a risk on the other side that we could get some combination of more persistence in the inflation effects that are gradually working their way through the system,” such as in wages and energy, while “supply capacity in the economy is weaker,” he said.
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