Responding to a recent contraction in the UK economy, the Bank of England is widely anticipated to cut interest rates by a quarter-point to 4% this Thursday. This strategic move, which would be the fifth reduction since last August, aims to counter rising unemployment and the negative impact of Donald Trump’s fresh round of import tariffs. Financial markets are expressing strong confidence in this decision, with an over 80% probability for the August meeting.
Chancellor Rachel Reeves is set to welcome the rate cut, as it is expected to ease the financial burden on households through lower mortgage rates and provide much-needed relief for businesses struggling with borrowing costs. However, the government’s dual challenge of boosting growth while reining in spending remains. The UK economy shrank by 0.1% in May and 0.3% in April, a contraction largely attributed by economists to the economic uncertainty stemming from Trump’s tariffs and the recent implementation of new business taxes.
Further evidence of economic fragility comes from the labor market, where job vacancies have fallen below pre-pandemic levels and the unemployment rate has risen to 4.7% in the three months to May, marking a four-year high. These figures underline the urgency of supportive monetary policy.
Despite a UK-specific trade deal, President Trump’s broader announcement of substantial tariffs on other trading partners is creating headwinds for global trade and, consequently, for UK economic growth. The International Monetary Fund’s subdued forecast, projecting minimal UK expansion for the latter half of the year, adds to the cautious outlook. The Bank of England’s updated forecasts, due on Thursday, are expected to reinforce these concerns, potentially indicating an imminent period of stagflation – a challenging scenario of slow growth combined with stubbornly high inflation, which currently sits at 3.6% CPI.