With the UK economy shrinking and Donald Trump’s tariffs beginning to bite, the Bank of England is poised to cut interest rates this Thursday. A quarter-point reduction to 4% is widely expected from the Monetary Policy Committee, marking the fifth cut since last August and returning rates to their March 2023 level. City traders are heavily betting on this move, with over an 80% chance of a cut at the August meeting.
The Chancellor, Rachel Reeves, is expected to embrace the rate cut, as it aims to provide much-needed relief to homeowners through lower mortgage rates and support cash-strapped businesses. However, the government faces a formidable challenge in stimulating growth while simultaneously reining in public spending. The UK economy contracted in May by 0.1% and in April by 0.3%, a slowdown attributed in part to the uncertainty caused by Trump’s tariffs and extra business taxes.
The latest labor market data further underscores the economic fragility, with job vacancies falling below pre-pandemic levels and the unemployment rate climbing to 4.7% in the three months to May, the highest level since June 2021. This deterioration strengthens the case for monetary intervention.
Despite a previously signed trade deal with the UK, President Trump’s recent announcement of additional import tariffs of up to 50% on other trading partners is set to harm global growth, with inevitable repercussions for the UK. The International Monetary Fund (IMF) recently tempered its outlook for the UK economy, predicting only modest expansion for the remainder of the year. The MPC’s fresh forecasts on Thursday could paint an even bleaker picture, indicating an imminent period of stagflation, marked by a slowdown in growth and stubbornly high inflation, currently at 3.6% CPI.