The Bank of England is widely expected to cut interest rates back to their March 2023 levels this Thursday, with a predicted quarter-point reduction to 4%. This anticipated fifth cut since last August reflects growing concerns over the UK economy, which is battling rising unemployment and the negative spillover from new import tariffs levied by Donald Trump. Financial markets are pricing in an 80% likelihood of this move, with further cuts possible before the end of the year.
The Chancellor, Rachel Reeves, is anticipated to welcome the rate reduction, as it promises to alleviate financial burdens on consumers through lower mortgage rates and offer crucial support to businesses struggling with borrowing costs. However, the broader economic context remains challenging, with the government aiming to stimulate growth while adhering to fiscal discipline. The UK economy contracted in both April and May, with economists pointing to Trump’s tariffs and recent business tax hikes as contributing factors.
The labor market is also showing signs of weakness, with job vacancies falling below pre-pandemic levels and the unemployment rate climbing to 4.7% in the three months to May, its highest since June 2021. These figures underscore the need for monetary intervention to support economic activity.
Despite a specific UK-US trade deal, President Trump’s broader announcement of new tariffs up to 50% on other global trading partners is creating significant uncertainty for international trade, impacting UK economic prospects. The International Monetary Fund projects only marginal growth for the UK in the coming quarters, reinforcing a cautious outlook. The Bank of England’s updated forecasts, set to be released on Thursday, are expected to be similarly pessimistic, potentially signaling a period of stagflation, characterized by low growth and elevated inflation, which currently stands at 3.6% CPI, well above the Bank’s 2% target.