After the Bank of England cut its base interest rate yesterday, as expected by the market, and the UK and US struck a trade deal, wealth managers discuss the impact on the economy, asset allocation and the possibility of further rate cuts in the UK.

The Bank of England Monetary Policy Committee (MPC) voted yesterday to cut interest rates by 0.25 per cent to 4.25 per cent, the lowest rate since May 2023, in a bid to boost spending. And on the same day, the US and UK governments agreed a trade deal, coming at a time when the UK faced uncertainties about trade with the world's largest economy.

The MPC voted five to four in favour of the cut, with two members preferring to reduce rates by 0.5 per cent to 4 per cent and two preferring to leave rates unchanged at 4.5 per cent.

“Inflationary pressures have continued to ease so we have been able to cut rates again today. The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach to further rate cuts. Ensuring low and stable inflation is our top priority,” the Bank’s governor Andrew Bailey said in a statement.

The UK inflation rate is estimated at 2.2 per cent and economic growth is expected to be almost stagnant for the rest of the year.

The vote came just before a deal was struck yesterday on the UK’s trade deal with the US – the first to be reached under US President Donald Trump – which Bailey welcomed in principle. Joaquin Thul, economist at Zurich-headquartered EFG Asset Management, welcomed the news of a trade agreement between the UK and US at a time of uncertainty over trade and the potential impact on economic activity. "The announcement from US President Trump is not entirely a “full and comprehensive” announcement of a trade agreement, but a statement of intent to work towards improving trade between both economies," Thul said. 

The deal is expected to include a reduction in tariffs for UK cars imported into the US, a reduction in tariffs for UK steel and aluminum products entering the US, as well as preferential access of US beef, ethanol and agricultural products imported into the UK. However, the National Farmers' Union has already raised concerns about the agreement.

Thomas Moore, senior investment director at Aberdeen, highlighted that UK sectors such as automotive and aerospace are the clear early beneficiaries. “Looking more broadly at the implications of the deal, investors should be reassured that the US is signalling its willingness to hammer out more trade deals. Any thawing in US/China relations would be warmly received by markets. As more deals are signed, this sets up a positive outlook for equity markets as the wall of worry is climbed,” Moore said.

Here are also some reactions from wealth managers to the interest rate cut.

Nicholas Hyett, investment manager at Wealth Club
“With inflation falling, and unexpectedly strong economic growth in February, the Bank of England has a remarkable freedom of movement at the moment. That’s reflected in the MPC vote split this time around – ranging from 4.0 per cent to 4.5 per cent. Ultimately though, the committee has, as expected, used its flexibility to clear the way for a soft landing after a period of moderate but stubbornly rising inflation at the end of last year.

“The government and markets will welcome a little bit of extra padding. Changes to the national living wage and employer national insurance contributions only came into effect in April, and have the potential to spark an uncomfortable combination of rising prices and weaker labour markets. So far, the economy has dealt with that looming speed bump surprisingly well, but some defensive driving from the Bank is no bad thing in an unpredictable market where key players have been known to suffer from the occasional bit of road rage.”

George Brown, senior economist at Schroders
“Today’s decision came as no surprise to anyone. But going forward, the Bank of England has far less scope to cut rates than the market currently expects. While Trump’s tariffs will provide some marginal relief through lower goods prices, the fundamental issue for the UK is that it continues to face considerable capacity constraints. As such, inflation looks set to rise again later this year as a result of disappointing productivity and sticky wage growth. To our minds, this is consistent with the Bank only taking interest rates as low as around 4 per cent this rate-cutting cycle."

Luke Bartholomew, deputy chief economist at Aberdeen
“No surprises in the Bank’s decision to cut interest rates by 25 bps. But the Monetary Policy Committee is clearly very divided on how policy should respond to the many shocks currently hitting the economy, with a three-way split in the voting pattern. This is highly unusual and will make it hard for the Bank to send a clear signal to the market about the likely path of policy. But with the Bank maintaining its guidance that further cuts will be “gradual and careful,” the chance of another cut in June has probably fallen significantly. We still think the Bank will cut rates at least twice more later this year, but UK policymakers will want to see more data on how tariffs and domestic tax increases are being digested by the economy before moving decisively. Bailey may face questions about the UK-US trade deal, but its impact on monetary policy is likely to be relatively modest, even if it may help to further support risk sentiment.”

David Katimbo-Mugwanya, head of fixed income, EdenTree Investment Management
“Having maintained relatively tight monetary policy settings that were well clear of the current rate of inflation – which is now projected to decline – there was ample room for the Bank of England to reduce interest rates ahead of today’s announcement – arguably more than they chose to take advantage of. Looking forward, the prevailing perception that disruptions to global trade could prove disinflationary for the UK economy solidifies the case for further cuts in short order, as policymakers look to mitigate the expected consequences of this disruption, notably to growth and employment.”

Daniele Antonucci, Quintet Private Bank (parent of Brown Shipley)
“The important point is that the Bank believes that around two-thirds of the damage to the economy is due to the broader effects of tariffs on the world economy rather than direct tariffs on UK goods. The impact of uncertainty in any economic forecast looks even more crucial this time around, as some or even most of the hit to businesses and consumers comes via the sentiment channel.

“A few weeks ago, when we rebalanced our portfolios, we decided not to go all the way to our previous equity overweight. We stopped at roughly neutral. We’ve recently raised exposure to high-yield bonds to a more neutral stance, funded by cash. We believe this position will help capture a higher yield in portfolios, but moderate sizing ensures that the trade-off between return and risk is appropriate for our strategy. Also, as US equity valuations are still on the demanding side, especially in technology, we continue to like our diversification strategy away from broad US equities and into an equal-weight US index.  

“Given our expectation of extra spending in defence and infrastructure, we bought some European equities including the UK. We combine our roughly neutral equity stance, which is designed to capture growth, with an overweight in short-dated government bonds, a defensive positioning to mitigate risks. We prefer European high-quality corporate bonds to their US counterparts, also underweighting US Treasuries as we think a high government debt level is a risk. Obviously, things remain very uncertain, so we stand ready to adjust positioning and mitigate the impact on portfolios caused by tariff uncertainty while also aiming to capture opportunities when trade de-escalation and policy stimulus materialise.”

Daniel Casali, chief investment strategist at UK wealth management firm Evelyn Partners
“While the macro picture has changed since the last Monetary Policy Committee (MPC) meeting in February to become more disinflationary, the BoE appears focused on cutting interest rates at a gradual pace of around one-quarter percentage point per quarter since it began easing last August. This decision came before any details on the UK-US trade [deal] had emerged, and indeed the devil will be in that detail. But this rate cut, alongside the news that the UK is the first country to strike a US trade deal, coming hot on the heels of the India agreement, will doubtless help the Government to paint a more optimistic picture for the UK economy.

“Serious challenges of course remain and US trade tariff and general policy uncertainty still suggest downside risks to growth, a point made by the BoE governor Andrew Bailey at an Institute of International Finance event in Washington last month. Furthermore, energy prices have also been trending south: the price of Brent crude oil is down nearly 30 per cent from a year ago, while sterling appreciation against the US dollar should also reduce import prices somewhat. All these factors should ease inflationary pressure in the near term. Nevertheless, MPC members will be wary of cutting interest rates too quickly. Looking forward, the MPC is expected to stick to gradual and careful guidance on interest rates by cutting once a quarter, as the risk of policy error remains high. Nevertheless, gradually lower rates should provide some insurance against downside risks to the economy and UK domestic stocks.”