Despite consumer price index (CPI) inflation remaining stubbornly above target, the Bank of England is widely expected to cut interest rates this Thursday in an attempt to stave off further economic decline. A quarter-point reduction to 4% is anticipated, driven by concerns over rising unemployment and the impact of Donald Trump’s new tariffs. This would be the fifth rate cut since last August.
While the 3.6% CPI figure for June is well above the MPC’s 2% target, the prevailing economic headwinds appear to be forcing the Bank’s hand. Chancellor Rachel Reeves is expected to welcome the lower mortgage rates and reduced borrowing costs for businesses that such a cut would bring, providing some economic relief. However, the government faces a challenging environment, aiming to boost growth while also controlling spending. The UK economy contracted in May and April, a downturn linked to Trump’s trade policies and recent business tax increases.
The labor market is showing clear signs of weakness, with job vacancies falling below pre-pandemic levels and the unemployment rate rising to 4.7% in the three months to May, its highest since June 2021. These indicators of a slowing economy are a key factor in the Bank’s decision-making.
President Trump’s announcement of new tariffs of up to 50% on various trading partners, despite a separate UK-US trade deal, is exacerbating global trade tensions and impacting the UK’s growth prospects. The International Monetary Fund’s modest forecast for the UK economy, predicting only slight expansion in the coming quarters, further highlights the precarious situation. The Bank of England’s fresh forecasts, to be unveiled on Thursday, are expected to be even more cautious, potentially indicating an imminent period of stagflation, where inflation persists despite subdued growth.
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