Tariffs may play a role in lowering inflation in the UK by dampening global demand and boosting the value of the pound, a Bank of England rate setter has said.
Megan Greene, an external member of the Bank’s Monetary Policy Committee (MPC), said she believes that the impact of tariffs on inflation is more likely to be disinflationary than inflationary, pointing to their influence in her decision to vote for a 0.25 percentage point base rate cut last week.
Speaking at the Bank’s annual Watchers’ Conference on Monday, Greene said: “I think on net, tariffs will probably be disinflationary for the UK economy, and that was the factor in determining the most recent decision to cut the bank rate by 25 basis points.”
The MPC voted 5-4 in May to lower the base rate from 4.5 per cent to 4.25 per cent – its lowest level in two years.
Greene said that Monday’s announcement of a temporary US-China agreement to suspend higher tariffs would not have changed her mind.
With inflation continuing its downward trajectory – currently sitting at 2.6 per cent – markets now expect three further rate cuts in the months ahead, though policymakers remain cautious.
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Greene, who joined the MPC in 2023 for a three-year term, acknowledged that while US tariffs mainly target UK goods that make up a smaller portion of total exports, the broader trade dynamics, including the recent UK-US trade deal, could still have a significant impact on domestic growth and inflation.
She said: “I don’t want to overstate the impact of trade on the UK economy. Around 70 per cent of the UK’s exports to the US are actually services, which aren’t directly impacted by tariffs.
“But with that said, the UK has a small, open economy, so there are a lot of indirect effects that would hit the UK economy and inflation as well.”
The UK-US trade deal, announced last Thursday, leaves in place Trump’s 10 per cent tariffs on UK exports but makes modest gains for both sides, including expanded agricultural access and lowered US duties on UK car exports.
Following the announcement, the pound briefly dipped, but it rebounded the next afternoon, gaining 0.3 per cent against the dollar to $1.3278, after reaching its lowest point since mid-April earlier in the day.
Greene noted the market’s reaction to these shifts, saying: “Exchange rates haven’t necessarily gone as economic theory would lead you to expect.
“The pound sterling exchange rate index is up moderately since [Donald Trump’s] ‘liberation day’ [tariff announcement]. If that continues, on balance, that could be disinflationary.”
A stronger pound could help ease inflationary pressures in the UK by reducing the cost of imports.
But Greene also warned that the broader picture of global trade fragmentation, driven by escalating tensions and trade wars, could have mixed long-term effects on inflation.
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She said: “Tariffs represent a global demand shock. There’s also a channel of trade diversion, which could be on balance, inflationary.
“But I think tariffs will likely be disinflationary for the UK economy.”
Greene’s stance on inflation contrasts with the more cautious view held by some of her colleagues on the MPC.
Chief economist Huw Pill and external member Catherine Mann pushed for keeping interest rates at 4.5 per cent, citing concerns over persistent inflationary pressures from wages and services.
While Greene’s decision to support the recent rate cut has been met with mixed reactions, she remains focused on the global trade developments and their influence on the UK economy.
She concluded: “The challenge is to try to net all these factors up with tariff policies changing all the time. So, it’s no easy task.
“There are some inflationary factors, but I think on net, there are more disinflationary ones. They’ll all hit the economy at different times, but that’s certainly a risk.”
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