Bank of England poised to cut rates as UK faces economic headwinds

The Bank of England is widely anticipated to reduce interest rates this Thursday, as policymakers seek to counteract rising unemployment and the adverse impacts of new trade tariffs imposed by the United States. City traders are pricing in a quarter-point cut to 4 percent, a move that would mark the fifth consecutive reduction since August last year and see borrowing costs return to their March 2023 level.

The Monetary Policy Committee’s decision comes at a time when economic data highlights mounting challenges. The UK economy recorded contractions of 0.1 percent in May and 0.3 percent in April. Economists attribute this weakening to lingering uncertainty stemming from President Trump’s latest tariff measures, as well as the extra business taxes from last autumn’s budget, which came into effect in April.

Vacancy numbers have dipped below pre-pandemic levels while the unemployment rate has climbed to 4.7 percent in the three months to May, its highest reading since June 2021. Pay growth has cooled more rapidly than previously forecast by the Bank of England, although food price inflation has jumped, exerting continued pressure on household budgets. Consumer prices rose by 3.6 percent over the past year, significantly overshooting the central bank’s 2 percent target and fuelling speculation around inflation persistence.

Market expectations assign over an 80 percent likelihood to a rate cut at the forthcoming August meeting. Financial analysts are already pencilling in another potential cut later in the year, as economic growth forecasts remain subdued. The International Monetary Fund recently projected the UK economy will expand by only 0.1 percent in both the third and fourth quarters of 2025, with modest improvement expected next year.

The nine-member MPC is expected to deliver a split vote, reflecting the difficult balancing act confronting the central bank. On one hand, lowering rates may ease the burden for mortgage holders and struggling businesses. On the other, underlying inflation provides grounds for caution, especially given the impact of rising food costs on expectations among consumers.

Chancellor Rachel Reeves is likely to welcome the anticipated reduction, which could provide limited relief to households and businesses alike. The government, however, continues to wrestle with the problem of boosting economic growth without adding to public sector spending ahead of the autumn budget. Despite a new UK-US trade deal capping most tariffs at 10 percent, the recent announcement of further import tariffs on major trading partners poses a significant risk to global economic momentum.

The MPC’s fresh economic projections, due for release this week, are expected to paint a sombre picture – with many analysts wary of a potential period of stagflation. As the UK stands at a critical junction, investors, policymakers and the public await clarity on the way forward.