Gold prices fall due to interest rate gloom and Middle East tensions. US Fed and major central banks likely to maintain current interest rates. Long-term gold outlook positive, seen as a hedge against risks.

【Bank of England Cuts Interest Rate by 25 Basis Points】A day after the US Fed decided to keep interest rates unchanged, the Bank of England (BoE) lowered its rates, highlighting the growing divergence between the US Fed and other global central banks in responding to Trump's tariffs. The BoE's Monetary Policy Committee (MPC) reduced the interest rate from 4.5% to 4.25% on Thursday, marking the fourth rate cut in seven meetings. This move brings the overall reduction in its borrowing costs in line with that of the US. Although the BoE has been more cautious in easing policy than other European central banks, it has cleared the way for more aggressive action if the tariffs hit economic growth harder than expected. In a statement, the BoE said, "The Committee will remain sensitive to the heightened unpredictability of the economic environment.

Despite the turmoil in the banking system, the Bank of England continued to raise interest rates.

On Thursday evening Beijing time, the Bank of England announced that, due to recent market volatility, it has canceled the plan to sell long-term government bonds originally scheduled for April 14, and will only sell short-term bonds instead. (Source: Bank of England) The Bank of England stated that it intends to reschedule the long-term bond auction to the next quarter, aiming to "cover all maturities as evenly as possible" during the process of reducing the bond holdings of the Asset Purchase Facility (APF). A spokesperson for the bank described this move as a "precautionary measure." As background, the closely watched yield on the UK 30-year government bond surged by 30 basis points on Wednesday, reaching a high of 5.64%, which is also the highest level since 1998. (UK 30-Year Government Bond Yield Daily Chart, Source: TradingView) Strictly speaking, the "blame" for the sharp decline in UK government bonds lies with Donald Trump across the ocean. His policies triggered a sell-off in US bonds, which in turn affected UK bonds that often move in sync with the US market. For the UK, the 30-year government bond is an extremely important and prominent asset. Due to the favor of insurance companies and pensions for this product, the country has issued a large amount of such bonds. The volatility on Wednesday also reached the extreme levels seen since the "Liz Truss fiscal plan shock" at the end of 2022. Because Trump's tariff proposal also has the characteristics of being reckless and lacking sufficient consideration, financial markets have often compared him to Truss in recent days. Regarding the severe volatility in UK and US government bonds, Tomasz Wieladek, Chief European Economist at T. Rowe Price, said: "Long-term bonds are gradually becoming a risky asset because there is great uncertainty and market liquidity is also very scarce." In addition to investors eager to cash out, there is also a layer of concern: the global trade conflict triggered by Trump may force the UK government to cobble together some policies to cope with economic shocks, leading to even tighter finances and ultimately having to turn to "opening the fiscal faucet." Sarah Breeden, Deputy Governor of the Bank of England, warned in a speech on Thursday that although the market is beginning to recover from the extreme turbulence of the past week, risk asset prices still face a high risk of significant correction. Breeden said: " A series of tariff measures implemented and then partially revoked by the US government, even after the adjustments announced yesterday, still constitute the most significant shift in US trade policy in a century. Overall, tariffs may suppress UK economic growth." She also stated that although the decline in UK export demand may alleviate inflationary pressures, supply chain disruptions could also lead to price increases, so it is still too early to determine what decision to make at the interest rate meeting on May 8. Currently, analysts are also paying attention to whether the recent severe market turbulence will have a longer-term impact on the Bank of England's balance sheet reduction plan. Pooja Kumra, Senior Interest Rate Strategist at TD Securities, said that the latest developments indicate that if market volatility remains unhealthy as in the past few trading days, the lifespan of quantitative tightening may be very short. The Bank of England's decision "clearly suggests that a period of quantitative tightening freeze is approaching," especially for long-term bonds. The Bank of England had previously planned to reduce its holdings of government bonds by £100 billion over 12 months starting from October 2024, including £13 billion in active sales.

On Thursday local time, the Bank of England (BoE) announced a 25 basis point interest rate cut, reducing the benchmark interest rate from 4.5% to 4.25%. This marked the fourth rate cut in the current easing cycle, in line with market expectations. The Monetary Policy Committee (MPC) approved the interest rate decision with a 5-4 vote. Five members supported a 25 basis point cut, two members advocated for a more significant cut (50 basis points), and two other members voted to maintain the key interest rate unchanged. The split voting lineup, with three factions, highlighted the chaos caused by US trade policies. MPC members Dhingra and Taylor voted in favor of a 50 basis point cut, arguing that the BoE needed to act swiftly to support the economy and ensure inflation does not fall below the target level. Given the uncertainties brought to the UK economy by Trump's across-the-board tariff impositions, BoE policymakers adhered to their guidelines that monetary easing should continue to be "gradual and cautious." BoE Governor Bailey stated, "Inflationary pressures continue to ease, allowing us to cut interest rates again today. However, the past few weeks have shown how unpredictable the global economy's trajectory can be. That's why we need to stick to a gradual and cautious approach." This decision demonstrated a tougher stance than expected, with the British pound initially diving against the US dollar before surging again. Reports also indicated that the UK is preparing to reach a trade deal with the US, which has supported the pound. Despite the prospect of a trade deal, the BoE made it clear that the impact of US tariff policies on the UK economy is real and will persist for some time. Due to rising costs and increased uncertainty, the shock to economic activity will reduce UK output by 0.3 percentage points over three years and lower inflation by 0.2 percentage points over two years. The BoE revised its economic growth forecast for 2025 upward to 1% (from a February forecast of 0.75%), slightly lowered its forecast for 2026 to 1.25% (from a February forecast of 1.5%), and maintained its 2027 forecast at 1.5%. Regarding inflation, the BoE currently expects inflation to peak at 3.5% in Q3 this year, down from a previous forecast of 3.7%, primarily due to falling energy prices. The inflation rate is expected to reach the 2% target by Q1 2027. Expectations for further rate cuts decline The BoE also presented two scenarios: one where goods supply may weaken, and domestic wages and prices in the UK may continue to rise; and another where inflationary pressures may ease more quickly due to greater or more prolonged weakness in demand relative to supply. The day before, the US Fed remained on hold. Fed Chairman Powell, who is often criticized by Trump, made it clear that the central bank would not rush to ease monetary policy until there was greater certainty about the direction of trade policy. Philip Shaw, chief economist at Investec, said that the Bank of England's interest rate cut was not surprising, but the fact that two members, including chief economist Huw Pill, preferred to keep interest rates unchanged reduced the likelihood of another rate cut at next month's meeting. Luke Bartholomew, an economist at Aberdeen, said that it was highly unusual for the Monetary Policy Committee (MPC) to be divided over Trump's tariffs, which would make it difficult for the Bank of England to send a clear signal to the market about the possible policy path. However, as the central bank maintained its guidance that further rate cuts would be gradual and prudent, the likelihood of another rate cut in June had significantly decreased. Julius Bendikas, head of European economics and dynamic asset allocation at Mercer Consulting, commented: "The Bank of England's MPC faces a tricky balancing act, with inflation and wage levels remaining high, but global trade issues likely to exert downward pressure on economic growth and inflation. We expect that as price and wage inflation slow further, the Bank of England will continue to cut interest rates, reducing them to 3.5% or lower by 2026."

Bank of England official Mann said that the problem of core and service inflation is very tricky. And it will be challenging to reduce the CPI to 2%.