Central Banks and Trump Tariffs: Will Interest Rates Be Cut

By: Swarnalata

Published on: May 06, 2025

The global economy is at a crossroads as central banks, particularly the Bank of England (BoE) and the US Federal Reserve, prepare to announce their latest interest rate decisions this week. These announcements mark the first since President Donald Trump’s “Liberation Day” tariff declarations on April 2, 2025, which have sparked widespread economic uncertainty. With trade tensions escalating, particularly between the US and China, and fears of an economic slowdown mounting, the question on everyone’s mind is: Will central banks cut interest rates to cushion the blow of Trump’s tariff turmoil, or will they hold steady? Let’s dive into the factors shaping these decisions and explore the potential outcomes.

The Backdrop: Trump’s Tariff Turmoil

Donald Trump’s announcement of sweeping tariffs, including a 10% levy on most imports to the US and up to 145% on Chinese goods, sent shockwaves through global markets. Although a 90-day pause was later introduced for many of these tariffs, the uncertainty persists. The International Monetary Fund (IMF) has warned that these trade policies could lead to a “significant slowdown” in global growth, with the US facing the largest downgrade among advanced economies, projecting only 1.8% growth in 2025, down from 2.7%. The IMF also estimates a 40% chance of a US recession this year.

These tariffs act like a consumption tax, raising prices for consumers and increasing input costs for businesses reliant on imported goods. Economists widely expect inflationary pressures to intensify, with US consumer inflation forecasts rising to 2.7% by year-end, up from 2.5% in December. In the UK, inflation is projected to hit 3.7% this summer, nearly double the BoE’s 2% target, driven by higher energy and food prices exacerbated by trade disruptions.

At the same time, tariffs threaten economic growth. The IMF has downgraded the UK’s 2025 growth forecast to 1.1% from 1.6%, citing Trump’s policies as a “growth shock.” Consumer and business confidence has plummeted, with the US Conference Board’s index of buying intentions recording its largest monthly decline in nearly four years. In the UK, private-sector activity sank to its lowest level since late 2022, reflecting hiring slowdowns and higher costs. This dual threat of rising inflation and slowing growth—often termed “stagflation”—places central banks in a precarious position.

The Federal Reserve’s Dilemma

The Federal Reserve, led by Chairman Jerome Powell, is set to announce its interest rate decision on Wednesday, May 7, 2025, following a two-day Federal Open Market Committee (FOMC) meeting. The Fed has maintained its benchmark rate between 4.25% and 4.5% since December 2024, and market expectations, along with expert analyses, suggest rates will remain unchanged this week.

The Fed faces intense pressure from President Trump, who has repeatedly called for rate cuts, most recently following a stronger-than-expected US jobs report. Trump argues that lower rates would ease borrowing costs and support his tariff-driven economic agenda, which he claims will boost domestic manufacturing. However, Powell has resisted, citing tariffs as a key driver of recent price increases. “Clearly some of it, a good part of it, is coming from tariffs,” Powell noted, emphasizing that the Fed is in a “wait and see” mode to assess the economic impact.

The Fed’s cautious stance is driven by its dual mandate: maintaining stable prices (targeting 2% inflation) and maximizing employment. Tariffs complicate this balancing act. On one hand, they are expected to push inflation higher, with consumer expectations for inflation jumping from 2.8% to 4.9% over the next year, according to a University of Michigan survey. On the other hand, tariffs risk slowing growth and increasing unemployment, particularly in trade-sensitive sectors like manufacturing. The Fed’s latest forecasts reflect these concerns, lowering US GDP growth to 1.7% for 2025 and raising inflation projections.

Some analysts, like Goldman Sachs’ Whitney Watson, describe the Fed’s position as navigating a “stagflationary” environment, where growth and inflation forecasts move in opposite directions. Cutting rates could stimulate growth but risks fueling inflation further, while holding or raising rates could curb inflation but exacerbate economic slowdown. For now, the Fed appears inclined to wait for clearer data, with projections suggesting possible rate cuts later in 2025 if inflation eases.

The Bank of England’s Response

Across the Atlantic, the BoE is expected to announce its decision on Thursday, May 8, 2025. Unlike the Fed, the BoE is widely anticipated to cut its key rate by 25 basis points to 4.25%, reflecting concerns over weakening UK growth amid Trump’s tariffs. Financial markets see an 86% likelihood of this cut, up from a 50/50 chance a week ago, with futures pricing in three quarter-point reductions by December 2025.

The BoE’s more dovish outlook is driven by several factors. First, UK inflation, while above the 2% target at 2.6% in March, is expected to decline due to lower energy prices and a stronger pound. Second, the UK economy faces significant headwinds from Trump’s tariffs, which include a 10% levy on UK goods entering the US. This has raised fears of reduced exports and job losses, particularly in manufacturing and construction. Third, domestic challenges, such as higher employer taxes and an increased minimum wage, are dampening hiring and wage growth, further justifying rate cuts to stimulate demand.

Some economists, including former BoE deputy governor Charlie Bean, advocate for a bolder half-point cut to counter the “disinflationary shock” of tariffs and address the uncertainty delaying business and consumer spending. However, not all Monetary Policy Committee (MPC) members agree. Inflationary pressures from rising energy and food costs could lead some to favor a more cautious approach, with back-to-back cuts in May and June seen as a potential “insurance” against Trump’s erratic trade policies.

Global Context and Central Bank Coordination

The tariff turmoil is not confined to the US and UK. The European Central Bank (ECB) recently cut its key rate to 2.25%, citing “exceptional uncertainty” from Trump’s trade policies. ECB President Christine Lagarde highlighted the dual impact of tariffs: they increase costs but could also depress demand, creating a complex inflationary outlook. Other central banks, including those in Canada and Japan, are also signaling readiness to cut rates to cushion their economies.

This global trend toward looser monetary policy reflects a shared concern: Trump’s tariffs represent a “once-in-a-century” shift in trade policy, as described by BoE Deputy Governor Sarah Breeden. The World Trade Organization warns that global trade could shrink, and the IMF predicts global growth will slow to 2.8% in 2025, down from 3.3%. Central banks are thus preparing to act as a buffer, but their ability to offset tariff-induced shocks is limited by the risk of reigniting inflation.

What’s at Stake for Households and Businesses?

For US and UK households, the central banks’ decisions will directly impact borrowing costs, from mortgages to credit cards. Lower rates could ease financial pressures, particularly for UK households facing higher taxes and energy bills. However, if inflation accelerates due to tariffs, real incomes could erode, offsetting any benefits from cheaper borrowing.

Businesses, especially those reliant on international trade, face heightened uncertainty. In the US, tariffs have already led to stockpile inventories and disrupted supply chains, with companies like JCB and Croome Cheese reporting unsustainable costs. In the UK, firms are scaling back hiring and investment, wary of trade barriers and weaker demand. Rate cuts could encourage investment, but only if central banks can navigate the inflationary risks.

The Road Ahead

The Fed’s likely decision to hold rates steady reflects its cautious approach to balancing inflation and growth in an uncertain environment. The BoE, however, appears more inclined to cut rates to counter the UK’s weaker growth outlook, though the size and pace of cuts remain debated. Both central banks are grappling with the same challenge: how to respond to a trade war that simultaneously fuels inflation and stifles growth.

Trump’s tariffs have upended the global economic order, and central banks are in uncharted territory. As Powell noted, “The economy is still in a solid position,” but the risks are mounting. The coming months will test the resilience of monetary policy and the independence of central banks, particularly the Fed, which faces political pressure from Trump.

For now, the smart money is on the Fed holding firm and the BoE taking a cautious step toward easing. But with tariffs, retaliatory measures, and market volatility in play, nothing is certain. What’s your take? Will central banks cut rates to weather the storm, or will they stand pat to tame inflation? Share your thoughts and join the conversation.