Trump tariffs batter FTSE 100 but what does market turmoil mean for interest rates and inflation?

It’s fair to say the market reaction to “Liberation Day” has been distinctly negative with traders’ screens turning red in the UK, and further afield.

London’s benchmark share index tumbled in morning trade in the wake of heavy falls in Asia after Donald Trump confirmed sweeping import levies on the UK and countries across the world, even if Britain got off relatively lightly at 10 per cent. By 10.30am on Thursday, the FTSE 100 index of leading blue-chip shares was down 103.4 points or 1.2 per cent at 8,505, having sustained heavy falls in the opening minutes of trading.

Key European indices suffered sharper falls, with the Dax in Germany and the Cac 40 in France both down more than 2 per cent after the US president’s self-declared “Liberation Day” saw him announce hefty tariffs on imports into the US, with a 10 per cent penalty for UK goods, including Scotch whisky and Scottish salmon - two key exports to the US.

Market traders were having to weigh up the implications of US President Donald Trump's sweeping trade tariffs.

There was no surprise to see investors turn to gold - deemed a safe haven in times of turmoil - as the precious metal hit another new record high, while the pound moved higher against a weaker US dollar.

Oil prices fell as the tariffs are expected to hit global economic growth and dent demand for crude, with Brent oil down more than 3 per cent to $72.4 a barrel. That could lead to fresh falls as the pumps for motorists.

Dan Coatsworth, investment analyst at AJ Bell, said investors had “put their tin hats on and buckled down to assess the damage to their portfolios”.

He added: “The FTSE 100 might have been in negative territory but it fell half the amount of Germany’s Dax index. The pharmaceutical sector cheered with joy as their products were exempt from Trump’s new tariffs.

Lower interest rates would benefit millions of borrowers though savers could lose out.

“GSK and AstraZeneca were among the rare risers on the FTSE 100 as they clawed back recent losses and also fell under the category of defensive stocks now high up investors’ shopping lists. Diageo was another riser as investors were relieved that tariffs on goods from the UK weren’t as punishing as previously feared.”

There are concerns that a sustained period of trade tariffs will lead to higher inflation, which could push back the likelihood of further cuts in interest rates, as millions of borrowers and businesses eye an easing in lending costs. Trump’s focus on immigration, austerity and trade protectionism is also leading to fears of stagflation - where there is sticky inflation and muted or no economic growth for a protracted period.

However, the prospect of weaker growth and a dent in UK GDP projections could force the Bank of England’s hand as it looks to stimulate spending and investment.

Pete Mugleston, mortgage advisor and managing director at Online Mortgage Advisor, said: “Trump’s Liberation Day speech has added yet more volatility to global markets and made a Bank of England rate cut more likely, especially if US-led trade tensions slow global growth. While any cut would be welcome news for borrowers, it’s important to remember the Bank will remain cautious and data-driven. That said, if economic uncertainty deepens, a lower base rate could ease pressure on mortgage holders and stimulate lending.”

Harry Goodliffe, director at HTG Mortgages, added: “A potential rate cut is definitely a step in the right direction, but we’ve been here before - nothing’s guaranteed. If it happens, it’ll be a welcome relief for homeowners and landlords who’ve been stretched by high borrowing costs.

“But until the Bank of England actually pulls the trigger, it’s just talk. The key right now is for borrowers to stay informed, plan ahead and be ready to act when the time comes.”

The Bank of England rate-setting committee’s next meeting take place on May 8. A further five meetings are then due to be held before the end of 2025 - in June, August, September, November and December.

James Knightley, chief international economist, US at ING, said the US central bank, the Federal Reserve, would be “in a quandary” following the tariff announcement.

“It will want to support the economy with rate cuts, but uncertainty over how long inflation may persist is likely to lead them to hesitate,” he said. “ING continues to forecast September and December [interest] rate cuts with a third in March 2026, but the gloomier near-term outlook for the economy means the risks are skewed to them having to do more this year.”

Matt Britzman, senior equity analyst at investment platform Hargreaves Lansdown, said the effects of Liberation Day were being felt “far and wide” amid concerns of a spiralling global trade war.

“While economists scramble to predict the impact on inflation and global growth, businesses around the world are getting their first real look at what a tariff-heavy US trade policy means, and this may just be the beginning of a fresh round of tariff drama,” he noted.

“Each country now faces the option of negotiating from this starting point, which, in theory, represents the worst-case scenario. A carrot has been dangled, but if countries opt for the stick, retaliation could mean things get worse before they get better.”

He added: “It’s hard to find many winners, but gold prices continued to rally as investors flocked to safer assets, reaching a fresh all-time high in the aftermath of Trump’s announcement, before pulling back a touch this morning.”

It is not clear how the 10 per cent tariff was arrived at for the UK, as the US measures are based not only on tariffs charged by countries but also non-tariff barriers to trade.

Trump highlighted the “exorbitant” rates of VAT as an example of a measure which hits US firms, even though the tax applies to purchases in the UK wherever the goods originated from.

Business Secretary Jonathan Reynolds said the average tariffs the UK has in place on US goods is “about 4 per cent” but the US was “adding in other policy issues to that equation”.

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