Many Eyes Looking At Interest Rates With The Fed, ECB and Bank Of England Expected to Cut

5th April 2025

The Federal Reserve, European Central Bank (ECB) and the Bank of England (BoE) are considering interest rate reductions as a response to the economic impact of tariffs.

Considering the pros and cons with tariffs helping to focus the minds of economists and bankers and not least the chancellor Rachel Reeves.

Bank of England: Economists predict that the BoE may cut interest rates up to three times this year, potentially bringing the base rate down to 3.75% by the end of 2025. This is in response to the economic strain caused by tariffs, which are expected to slow growth and increase costs for businesses.

European Central Bank: The ECB has already reduced its key interest rates by 25 basis points, signalling a shift toward a more accommodative monetary policy. This move aims to counteract the potential economic slowdown resulting from trade tensions.

The Federal Reserve is expected to proceed cautiously with interest rate adjustments in 2025. Current projections suggest that the Fed may implement two quarter-point rate cuts this year, bringing the federal funds rate down from its current range of 4.25% to 4.50%2. These cuts aim to address economic uncertainties, including inflation and the impact of tariffs.

The Fed's next meeting is scheduled for May 7, where further decisions may be announced.

Central banks face a delicate balance between supporting economic growth and managing inflation, which could be affected by higher import costs due to tariffs.

Interest rate cuts in the UK can have a mixed impact on industries and consumer prices:

Boost to Industry: Lower interest rates reduce borrowing costs for businesses, encouraging investment in expansion, innovation, and hiring. This can stimulate economic growth and benefit industries like manufacturing, construction, and retail.

Impact on Consumer Prices: While lower rates can increase disposable income for consumers, they don't directly lower prices. However, increased competition among businesses due to higher demand might lead to price reductions in some sectors.

The overall effect depends on how businesses and consumers respond to the rate cuts.

The Bank of England is increasingly likely to cut interest rates soon, with markets predicting up to three rate cuts by the end of 2025. The first cut could happen as early as May, with a 77% probability of a reduction at the next Monetary Policy Committee meeting.

An interest rate cut by the Bank of England in May could have several effects on both industry and consumers:

For Industry: Lower interest rates reduce borrowing costs for businesses, making it cheaper to finance expansion, invest in new projects, or manage existing debt. This can stimulate growth in sectors like manufacturing, construction, and retail. However, industries reliant on exports might face challenges if the pound weakens, as it could increase import costs for raw materials.

For Consumers: Reduced interest rates can lower mortgage payments for those on variable-rate or tracker mortgages, freeing up disposable income. It also makes loans and credit more affordable, encouraging spending. However, savers might see reduced returns on savings accounts, which could impact those relying on interest income.