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Liberation Day tariffs could prove stagflationary
“We think President Trump’s ‘Liberation Day’ tariff salvo will prove stagflationary – damaging global growth and increasing prices for businesses and consumers,” said Robert Wood, chief UK economist at Pantheon Macroeconomics.
The research provider has cut its growth forecasts for 2025 and 2026 as a result. It now expects UK GDP to rise by 0.9% in 2025 and 1% in 2026, down from 1.1% and 1.5% previously.
Although inflation slowed to 2.6% in March, Pantheon expects it to pick up significantly over the coming months, potentially hitting 3.4% in the second quarter and only falling to 3.3% by the end of the year.
The researcher points out that a “barrage of price hikes” will appear when April’s data is released later this month, reflecting hikes to things like energy bills, water bills and more.
“The bulk of the data since our last forecast review would ordinarily keep the MPC on a decisively cautious footing. But President Trump’s tariffs have upended the global economy and roiled financial markets,” Wood said.
Against this backdrop, Pantheon is forecasting three more rate cuts this year (all 25 basis points), including back-to-back cuts in May and June, with a final cut in November.
How many more interest rate cuts in 2025?
Most economists expect at least two more rate cuts from the Bank of England before the end of 2025.
Consultancy Capital Economics thinks rates will be trimmed by 25 basis points in May, followed by a further 25 basis-point cut in November. This would take the base rate to 4% by the end of the year.Financial institution ING is forecasting quarterly cuts. This would mean three more cuts in 2025 (we already had one in February), bringing the base rate to 3.75%. The International Monetary Fund has also predicted three more cuts, as have economists polled by Reuters.Deutsche Bank on the other hand is expecting four (May, August, November and December), taking the base rate to 3.5% by the end of the year.
Deutsche Bank’s forecast (four rate cuts) aligns with market predictions. Markets are currently pricing in a 50% chance that rates end the year at 3.5%.
What are tariffs – and will they prompt a recession?
Tariffs are import taxes that make it more expensive to buy foreign goods. They are often imposed as part of a protectionist policy to encourage consumers to buy goods that are manufactured on home soil.
These taxes are paid by the company that imports the goods, but importers typically pass the cost on to consumers by building it into their prices, making things more expensive. For this reason, tariffs can be inflationary.
Donald Trump claims tariffs will be good for the US economy. He has persistently criticised the trade deficits in place between the US and trading partners, and has suggested the additional customs duties could be used to pay down US debt and cut income tax. The reality is more complex.
When tariffs are imposed or increased, businesses import fewer foreign goods because it becomes more expensive. This means custom duties are unlikely to be as lucrative as Trump has suggested.
Tariffs are unlikely to be as lucrative as Donald Trump has suggested. Economists expect them to push US inflation higher and slow global economic growth.
(Image credit: Photo by Anna Moneymaker/Getty Images)
Other countries generally retaliate with tariffs of their own, meaning the US could end up making less money from exports too. For this reason (and others), tariffs are also expected to have a damaging effect on economic growth. Let’s take a closer look at why.
Firstly, the global economy is highly interconnected. Take Apple as one example. Almost every iPhone sold in the US is manufactured in China. The company is planning to shift a large part of its production to India to mitigate the impact of tariffs. Projects like this are costly.
When business costs go up, companies often increase their prices to protect their bottom line. But when goods become more expensive, consumers can’t afford to buy as many things. This often translates into an economic slowdown.
The International Monetary Fund (IMF) recently downgraded its global growth forecast by 0.5 percentage points in 2025 in response to Trump’s tariffs. It downgraded its US growth forecast by 0.9 percentage points.
Both projections remain in positive territory – the IMF has forecast global growth of 2.8% this year and US growth of 1.8% – but recessionary risks have increased.
“While we are not projecting a global downturn, the risks it may happen this year have increased substantially, from 17 percent projected back in October to 30 percent now. An escalation of trade tensions would further depress growth,” said Pierre‑Olivier Gourinchas, research director at the IMF.
The latest data shows the US economy shrank by 0.3% on an annual basis in the first quarter, as imports surged as businesses tried to get ahead of incoming tariffs. Imports are subtracted when calculating GDP, as they reflect money spent on goods and services produced outside of the US.
Impact of Trump’s tariffs
This is the first Bank of England decision since Donald Trump announced his “Liberation Day” tariffs, unleashing chaos in markets and increasing the chances of a global economic slowdown.
Trump has now paused the worst tariffs for a period of 90 days, but a “baseline” tariff of 10% has been applied to most countries. China has been slapped with an effective tariff rate of 145%.
Other more targeted measures (some of which were announced before “Liberation Day”) have also been directed at certain industries, including automobiles, steel and aluminium.
“Donald Trump’s tariffs have caused a massive reappraisal of the future path of UK interest rates,” said Laith Khalaf, head of investment analysis at AJ Bell.
“As things stand markets are focusing on the collateral damage to the UK economy rather than the potential for a trade war to ignite inflation once again. As a result, the market is now assigning a 50% chance to the base rate being 3.5% or lower by the end of this year.”
Khalaf’s advice is to avoid inking this into your calendar, though.
“Right now the ultimate shape of US trade policy, and its economic effects, are about as clear as a muddy puddle in the dead of night. Forecasts are by their nature vulnerable to correction by unfolding economic reality, and that applies in spades right now,” he said.
That said, Trump’s tariffs will almost certainly feed into the Bank of England’s decision-making tomorrow. Expect the meeting minutes to contain a detailed discussion on this point.
Since the end of the Second World War, we have lived through an era of free trade. Could Trump’s tariffs turn this world order on its head?
(Image credit: Photo by VCG/VCG via Getty Images)
Odds of a 50 basis-point cut
While most economists are forecasting a 25 basis-point cut, several are expecting some MPC members to vote for a more aggressive approach. Swati Dhingra and Catherine Mann have voted for 50 basis points in the past, and could take a similar stance this time around.
“A 50 basis-point rate cut will be firmly on the agenda at the Bank of England’s upcoming meeting, reflecting a shift in the economic backdrop since March’s pause,” said Steve Matthews, investment director at Canada Life Asset Management.
“Global trade disruption and signs of slowdown – highlighted by the recent quarterly fall in US GDP – have brought a larger drop into focus. With UK CPI inflation now broadly in line with target, we expect MPC members Dr Swati Dhingra and Dr Catherine Mann to back a 50 basis-point move, opening the door to a potential surprise cut.”
That said, Matthews expects this faction to be outvoted, with a “narrow vote” ultimately resulting in a 25 basis-point cut to 4.25%.
Rate cut widely expected tomorrow
Good morning and welcome to our live blog. The Bank of England will announce its next interest rate decision at 12.02pm tomorrow. The decision will come two minutes later than usual to respect the two-minute silence being held in commemoration of VE Day.
Just as the weather has been warming up, interest rates are expected to thaw in what could be the first cut this spring. We haven’t had an interest rate cut since February. The Monetary Policy Committee (MPC) held rates steady at 4.5% when it last met in March.
A 25 basis-point cut would take the base rate to 4.25%, a whole percentage point lower than its recent high of 5.25%. The Bank of England began its rate-cutting cycle last August. It has cut rates three times since then – first in August, then in November, and most recently in February.