Interest rates slashed for second time this year

The Bank of England has cut interest rates again to 4.75% – although it came with a warning, that Rachel Reeves’ budget would add more inflationary pressure to the economy.

The Bank’s governor Andrew Bailey said he hoped to bring rates down still further but he said maintaining inflation above the 2% target level should not become entrenched.

And with Donald Trump pledging to impose higher tariffs, Mr Bailey promised to keep making the case for free trade.

We spoke to the Governor of the Bank of England and began by asking him whether he’s expecting higher inflation because of the budget.

Andrew Bailey: Let me say this. Two things. One, good news, we’re starting from a lower level. Two, yes, inflation is going to go up a bit. But let me emphasise a bit, because compared to what we’ve been dealing with over recent years, this is all going to be very small. Now some of that was already sort of in the mix as it were, because it’s the effects of energy price movements a year ago coming off.

Helia Ebrahimi: But some of it is the budget?

Andrew Bailey: The budget does add, we’ve set it out and what we’ve published today, yes, it does add a bit. However, important thing, actually, our assessment is that inflation is going to come sustainably back to target within the horizon we look at, and that’s another reason why we’ve been able to cut rates today.

Helia Ebrahimi: There’s a lot of emphasis, though, today about a greater degree of uncertainty. Is that homegrown uncertainty or international uncertainty?

Andrew Bailey: There’s a lot of international uncertainty. So there’s domestic uncertainty, but there is a lot of global uncertainty as well.

Helia Ebrahimi: Tariffs?

Andrew Bailey: Let’s wait and see what the new administration does when it’s in office. Obviously, we’ve got events going on around the world which are obviously causing uncertainty, risks to the broader fragmentation of the world economy coming for us. So we have to watch these things.

Helia Ebrahimi: How closely are you watching what happens with global trade and US tariffs?

Andrew Bailey: Very closely because the UK is a very open economy.

Helia Ebrahimi: It makes a difference to us, we’re not insulated because we’re a service weighted economy?

Andrew Bailey: Well no, one of the things about the UK is that we trade services a lot. We don’t just trade goods. We are very big in services trade. Actually the UK, if you look at it, for many countries goods are the more traded things. The UK, actually, we are a very big trader of services.

Helia Ebrahimi: You’re an economic historian, what does history tell us about the risks of global trade fragmentation?

Andrew Bailey: I have to be honest with you, I am a free trader at heart. Maybe it’s because I’m an economic historian, I’m very proud of the fact that Britain is really the cradle of free trade.

Helia Ebrahimi: Does it worry you then that there’s going to be increased fragmentation?

Andrew Bailey: I absolutely agree with what the chancellor said yesterday and I think she also said it today, which is the UK is an open economy, trade matters to us. We’re going to argue, and I will join the chancellor in this, very strongly for the benefits of open markets and free trade. That’s what the UK has always done. I’m very proud of it and we will go on doing it because it’s the right thing.

Helia Ebrahimi: It seems like the loudest voices in the world, though, are proponents of trade barriers being drawn up all across the world. Do you envisage a world where we go back to the 1930s, for example, where tariffs and counter retaliation is drawn out? Do you worry about that world?

Andrew Bailey: Well, I do. I worry about fragmentation of the world economy because it is just not a good thing for the world economy. It’s not a good thing for anybody in the world economy.

Helia Ebrahimi: It seems to be the direction of travel, though, and the IMF is very worried about that.

Andrew Bailey: Yeah. As is the World Trade Organisation as well. It is a shared concern.

Helia Ebrahimi: So isn’t a world of tariffs, a world where tariffs go up to 20 per cent, 60 per cent, isn’t that a world of protectionism? One we should guard against?

Andrew Bailey: Let’s see where this all goes. It’s important, and to come back to what the chancellor said, those of us, and I think particularly in this in Britain, because of our history and our position, make the case for free trade.