With everything going on in the global economy, it’s easy to overlook the UK, but it was an eventful week for the island nation. From a Bank of England rate cut to fresh trade deals with India and the U.S. and a stark warning about its fiscal future, the UK packed a lot into just a few days. In this post, we’ll break down the key headlines and explore what they mean for the country’s economic outlook in the year ahead. Let’s dive in.
Uncertainty Everywhere: A 25bp Cut and a Split Monetary Policy Committee
Last week, on the 8th of May, we saw the Bank of England (BoE) cut the base interest rate from 4.5% to 4.25%, the first cut since February earlier this year. The cut came after the BoE noted that inflation was easing, supported by data from April showing UK inflation had fallen more than expected to 2.6% in March.
The decision to make the cut was far from unanimous, however, with the Monetary Policy Committee being notably split. Five of the nine Monetary Policy Committee (MPC) members voted for the 25-basis point cut, while the remaining four members’ votes were split between a bumper cut and no cut at all.
Members Swati Dhingra and Alan Taylor voted for a 50-basis point cut, warning that global trade tensions and political uncertainty, especially around U.S. policy, posed serious risks to UK growth. With inflation under control, they argued a deeper cut would better support the economy and act as a safeguard against worsening global conditions.
Huw Pill and Catherine Mann took the opposite stance, voting to keep rates unchanged. Their main concern was persistent inflationary pressures, pointing to the resilient labour market as a key driver. They also noted that households, having been hit hard by the recent cost of living crisis, have become more sensitive to price changes, increasing the risk of inflation becoming more persistent.
The market didn’t react to the rate cut as many would expect, with UK bond yields rising after the announcement. Many economists say this is because the split nature of the MPC reflects uncertainty and a more hawkish tilt in policy direction. Sanjay Raja, chief UK economist at Deutsche Bank, highlighted that a divided MPC lowered the likelihood of back-to-back rate cuts from the BoE. This opinion can be seen too in market movement, as traders are now pricing in fewer and more gradual rate cuts than previously anticipated.
Two Deals, One Week: Is UK Trade Turning a Corner?
India Free Trade Agreement
On Tuesday it was announced that the UK and India had come to a trade deal after three years of negotiations. The deal will see both nations reduce tariffs on imports, improve access to services and investment, and open up public procurement. The agreement marks a major milestone for UK-India relations.
The main highlight from the agreement was the tariff reductions, as India has agreed to cut tariffs on 90% of UK exports, with 64% becoming tariff-free right away and 85% within ten years. Automotives, whisky and gin are amongst the biggest winners, seeing the largest reduction in tariffs, but other food products and machinery exports have also seen hefty reductions in trade barriers.
The UK government are hoping this deal will have lasting benefits for UK exporters and the economy in the coming years, expecting £400 million worth of savings for UK exporters when it comes into force, rising to £900 million in a decade’s time. The UK government stated the deal would increase bilateral trade by £25.5 billion and UK GDP by £4.8 billion in the long run, highlighting the deal’s aim of creating long-term growth and benefits for the UK.
However, not all aspects of the deal have been welcomed without concern. The new agreement includes a clause that will exclude Indian firms’ UK operations from paying national insurance for up to three years for Indian employees moving to the UK, making it less expensive to relocate to Britain than it was before. Keir Starmer and his Labour Party have received heavy scrutiny over this for many reasons. Firstly, it’s being seen as unfair on UK workers who need to pay national insurance from day one, unlike Indian employees who could be exempt. Critics are also pointing out the potential loss of tax revenue that is used to fund key public services, such as the NHS, which is already greatly underfunded. Additionally, in a climate where there is heightened concern over immigration, making it cheaper for foreign workers to relocate has raised alarm. The policy has opened up Labour to criticism over their stance on fairness and fiscal responsibility, allowing rivals like Nigel Farage’s Reform to gain public support.
First Trade Deal of Trump’s Trade War
Last week, the UK became the first country to secure a trade deal with the US since Donald Trump began raising tariffs and triggering a global trade war. The agreement has been broadly welcomed in the UK and is seen as a crucial first step in rebuilding the UK-US trade partnership. However, like the India deal, it is not without its critics.
Unlike the India deal, this is not a full free trade agreement. Instead, it targets tariff reductions in a few key sectors. Tariffs on British car exports to the US have been cut from 27.5% to 10% for up to 100,000 vehicles annually, with higher tariffs applying beyond that quota (The UK exported 101,000 cars to the US last year). The UK’s metal industry will also benefit from the removal of the 25% tariffs on aluminium and steel. Tariffs on British aerospace parts are expected to be lifted, offering a boost to the UK’s £40 billion aerospace sector.
These changes are expected to ease pressure on major British exporters such as Jaguar Land Rover and Rolls-Royce, both of which have been hit hard by US trade barriers. Supporters argue the deal could help preserve jobs and competitiveness in the industries that stand to benefit.
Given the speed at which the deal was put together, criticism was perhaps inevitable, particularly around what was left out and the concessions made to secure quick gains. Critics have been quick to point out the 10% baseline tariffs still apply for most UK exports, along with other sector-specific trade barriers that remain in place. This is seen to be particularly unfair as the UK has agreed to lower their baseline tariff on US imports to 1.8%, down from 5.1%.
Concessions on US beef and ethanol have also caused concern. The UK has agreed to allow tariff-free access for 13,000 metric tonnes of American beef and 1.4 million litres of ethanol, raising alarm among UK producers who fear being undercut by cheaper US imports.
These concerns have given the Labour opposition more ammunition for publicly criticising the deal. Kemi Badenoch, the leader of the Conservative Party, stated, ‘When Labour negotiates, Britain loses. We cut our tariffs. America tripled theirs. Keir Starmer called this ‘historic’. It’s not historic; we’ve just been shafted!’ Such reactions have added to the perception that the deal was rushed and politically motivated, prioritising speed over substance and leaving the UK with limited gains in return.
Storm Clouds Ahead? Think Tank Slashes UK Growth Forecast
Just as the UK is looking to stimulate growth through trade deals and monetary easing, a leading economic think tank is sounding the alarm. The National Institute of Economic and Social Research (NIESR) downgraded its 2025 UK GDP growth forecast from 1.5% to 1.2%, identifying cost pressures, weak business confidence, and policy uncertainty as key drags on growth.
The research firm warned that this lower growth outlook raises the risk that the government is on course to break its own self-imposed fiscal rules. In October 2024, the government introduced a budget in which they set out two key goals: to cover day-to-day spending with tax revenue and to reduce public sector debt as a share of GDP. NIESR believes they will miss both of these targets, forecasting a £57 billion shortfall in the current budget by 2029-30, meaning the government would still be borrowing to fund daily operations, despite plans to balance the budget. The think tank also sees the government overshooting its second target by £25 billion, meaning public sector debt will actually increase!
Upon this forecast update NIESR warned that Chancellor Rachel Reeves will be forced into either tax hikes or spending cuts to accommodate the government’s budget plans, highlighting that despite current geopolitical uncertainty many of the British government’s problems are homegrown, driven by bad policy and decision-making. Public releases like this from NIESR are increasing pressure on the Labour government, not just from opposition parties but from a public that’s becoming more vocal about its concerns over economic direction and fiscal credibility.
All things considered, it’s been a week of mixed signals for the UK economy. A modest rate cut, two new trade agreements, and ambitious fiscal goals suggest a government trying to chart a path to consistent long-term growth. However, considering the fragmented MPC, the gaps in both trade deals, and declining growth forecasts, a harsher truth could be the reality.
Should external pressures cause inflation to become stickier, the Bank of England may be forced to stall further cuts, leaving little room for monetary policy to spark growth. The trade agreements, while symbolically important, seemingly bring as many challenges as they bring benefits, with both deals containing concessions that could hurt UK businesses and consumers. Finally, from a fiscal perspective, threats of missing core budget rules will pose difficult decisions: higher taxes, lower spending, or both.
For Keir Starmer and his Labour Party, the stakes are higher than ever. Public support is slipping as pre-election promises aren’t being delivered. Without a coherent long-term strategy and some tangible wins soon, Labour risks losing its image as a driver of change, becoming just the latest party to overpromise and underdeliver.
