Interest Rate Path: Bank of England Signals Further Cuts Ahead

The Bank of England’s anticipated interest rate cut this Thursday signals a likely path of further reductions, with financial markets penciling in another quarter-point drop before year-end. A quarter-point reduction to 4% is expected for the upcoming MPC meeting, marking the fifth cut since last August, driven by concerns over rising unemployment and the economic impact of Donald Trump’s new tariffs. Markets are pricing in an over 80% chance of this August cut.
The Chancellor, Rachel Reeves, is poised to welcome the decrease, which promises lower mortgage rates for homeowners and reduced borrowing costs for businesses. However, the broader economic context highlights a difficult situation for the UK government, which is struggling to boost growth while trying to limit Whitehall spending. The economy shrank 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 continued monetary easing.
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.