The Bank of England has cut interest rates from 4.5% to 4.25%, citing Donald Trump’s trade war as one of the key reasons for the reduction in borrowing costs.

In a decision taken shortly before the official confirmation of a trade deal between Britain and the United States, the Bank’s monetary policy committee (MPC) voted to reduce borrowing costs in the UK, saying the economy would be slightly weaker and inflation lower in part as a result of higher tariffs.

However, it stopped short of predicting that the trade war would trigger a recession.

Money latest: What rate cut means for you

Further rate cuts are expected in the coming months, though there remains some uncertainty about how fast and how far the MPC will cut – since it was split three ways on this latest vote.

Two members of the nine-person MPC voted to reduce rates by even more today, taking them down to 4%. But another two on the committee voted not to cut them at all, leaving them instead at 4.5%.

In the event, five members voted for the quarter point cut – enough to tip the balance – with the accompanying minutes saying that while “the current impact of the global trade news should not be overstated, the news was sufficient for those members to judge that a reduction in Bank Rare was warranted.”

Even so, the Bank’s analysis suggests that while higher tariffs were likely to depress global and UK economic growth, and help push down inflation, the impact would be relatively minor, with growth only 0.3% lower and inflation only 0.2% lower.

Governor, Andrew Bailey, said: “Inflationary pressures have continued to ease, so we’ve 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.”

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The Bank raised its forecast for UK economic growth this year from 0.75% to 1%, but said that was primarily because of unexpectedly strong output in the first quarter.

In fact, underlying economic growth remains weak at just 0.1% a quarter.

It said that while inflation was expected to rise further in the coming months, peaking at 3.5% in the third quarter, it would drop down thereafter, settling at just below 2% towards the end of next year.

On the politics, this is a win for Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves. And a big one: just at the point he really needed it after terrible local elections and few signs the economy is going the right way.

For months, the prime minister has been doubling down on a chunky bet – that there were more benefits than costs to hug close Donald Trump, the most technicolour, unpredictable and contentious political figure of the modern era.

There have been moments when this gambit felt like a mistake, when tariffs were first imposed and not subsequently reduced for the UK and, separately, as a deal over Ukraine slid in the wrong direction.

This is also a win when it comes to timing. Not only have we beaten nations like Japan, which had reportedly been further up the queue, but this deal comes before the May 19 reset with the EU, which has always risked setting back British relations with the White House if Mr Trump took exception to strengthening ties to a bloc he regularly attacks.

But at 3pm today, when Mr Trump makes his announcement that the UK is the “big and highly respected country” to get the first trade deal of his second presidency, he will be able to claim this has paid off.

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It is a “substantial” deal, I’m told. Even if we only hear the heads of terms today, it will allow the prime minister to say he has saved jobs – an important boast at this uncertain juncture.

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The extent of the economic win will still have to be weighed up.

The question is: how much will it deliver and how much will it help?

The big question is how much it will be to help the (newly state-run) UK steel industry and the (fragile) UK car industry, which faces 25% tariffs for goods going to the US. Will they now be set at 10% or zero?

Another big question is whether the 10% tariffs on everything else heading to the UK will be reduced to zero – something government sources were playing down just a fortnight ago.

Then there’s the question of what we have given in return – for the Trump White House surely will have demanded a hard bargain.

Ministers were not denying they would allow cuts to the digital services tax – a bung for billionaire owners of companies like Mark Zuckerberg’s Meta, which owns Facebook, at a time when taxes are going up and benefits are going down in the UK.

Meanwhile, some UK sectors are likely to face additional competition – quotas of US food products are likely to be increased, even if food standards will not be lowered.

This is a win for patient diplomacy and for the Starmer approach to the White House over the EU shouting. He will enjoy the moment.

Donald Trump has hailed the trade deal with the UK as “full and comprehensive” as he promised it would cement the relationship between the two countries for “years to come”.

The US president said it was a “great honour” to strike an agreement with the UK and said deals with other countries would soon follow.

Posting on the Truth Social website, Mr Trump said: “The agreement with the United Kingdom is a full and comprehensive one that will cement the relationship between the United States and the United Kingdom for many years to come.

“Because of our long time history and allegiance together, it is a great honour to have the United Kingdom as our FIRST announcement. Many other deals, which are in serious stages of negotiation, to follow!”

Reports that the two countries had struck an agreement first emerged in the New York Times – and Sky News has since been told that terms had now been agreed.

Deputy political editor Sam Coates says he understands a “heads of terms” agreement, essentially a preliminary arrangement, has been agreed, which is a “substantive” step towards a full deal.

No physical UK-US trade document is expected to be signed today as a result.

Follow live: UK-US trade deal

While the details are yet to emerge, Sky News business correspondent Paul Kelso understands the UK has agreed to give some concessions on food and agriculture imports from the United States to secure an easing of export tariffs for the car industry.

Kelso said the “heads of terms” deal appears to be coming down to what the UK can secure by way of concessions on tariffs.

Shortly after the New York Times report emerged, the value of the British pound rose by 0.4% against the US dollar.

‘Renewal for our country’

Mr Trump said “this should be a very big and exciting day” for the US and UK, in a post on Truth Social on Thursday, adding there would be an announcement in the Oval Office at 10am local time (3pm UK time).

Meanwhile, Sir Keir Starmer vowed to “deliver security and renewal for our country” ahead of the expected announcement.

Speaking to the London defence conference, Sir Keir said: “Talks with the US have been ongoing and you’ll hear more from me about that later today.

“But make no mistake, I will always act in our national interest, for workers, businesses and families, to deliver security and renewal for our country.”

Senior Trump officials have been engaging in a flurry of meetings with trading partners since the US president announced his “liberation day” tariffs on both the US’ geopolitical rivals and allies on 2 April.

Mr Trump imposed a 10% tariff on most countries including the UK during the announcement, along with higher “reciprocal” tariff rates for many trading partners.

However, those reciprocal tariffs were later suspended for 90 days.

Britain was not among the countries hit with the higher reciprocal tariffs because it imports more from the US than it exports there.

However, the UK was still impacted by a 25% tariff on all cars and all steel and aluminium imports to the US.

A UK official said on Tuesday that the two countries had made good progress on a trade deal that would likely include lower tariff quotas on steel and cars.

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Mr Trump said the same day that he and top administration officials would review potential trade deals with other countries over the next two weeks to decide which ones to accept.

Last week, he said that he has “potential” trade deals with India, South Korea and Japan.

Asked on Sky News’ Breakfast programme about the UK-EU summit on 19 May and how Sir Keir would balance relationships with the US and EU, Coates said: “I think it is politically helpful for Keir Starmer to have got the heads of terms, the kind of main points of a US-UK trade deal, nailed down before we see what we have negotiated with the EU — or, more importantly, Donald Trump sees what we have negotiated with the EU.”

Coates said there was “always a danger” that if it happened the other way around, Mr Trump would “take umbrage” at negotiations with the EU and “downgrade, alter or put us further back in the queue” when it came to a UK-US trade deal.

US and Chinese officials to discuss trade war

It comes as the US and China have been engaged in an escalating trade war since Mr Trump took office in January.

The Trump administration has raised tariffs on Chinese goods to 145% while Beijing has responded with levies of 125% in recent weeks.

US Treasury secretary Scott Bessent and US trade representative Jamieson Greer are set to meet their Chinese counterparts in Switzerland this week to discuss the trade war.

China has made the de-escalation of the tariffs a requirement for trade negotiations, which the meetings are supposed to help establish.