Despite a recent jump in food inflation, the Bank of England’s Monetary Policy Committee (MPC) is still widely anticipated to cut interest rates by a quarter-point to 4% this Thursday. This comes amidst rising unemployment and the economic fallout from Donald Trump’s new tariffs. While the overall sentiment points to a cut, there is expected to be a split vote, with some “hawkish” members likely to favor holding rates due to lingering price pressures.
The predicted rate reduction, the fifth since August last year, is seen as a necessary measure to prevent the UK economy from sliding further. Chancellor Rachel Reeves is expected to endorse the move, which should ease mortgage burdens and reduce borrowing costs for businesses. However, the UK economy contracted in both April and May, a downturn attributed to the uncertainty generated by Trump’s protectionist trade policies and the impact of new business taxes.
The labor market reflects this weakening trend, with job vacancies now below pre-pandemic levels and the unemployment rate rising to 4.7% in the three months to May, marking its highest level in over four years. This concerning data adds weight to the arguments for a rate cut to stimulate economic activity.
Adding to the complexity, the International Monetary Fund has issued a subdued forecast for the UK, predicting only minimal growth for the remainder of the year. The Bank of England’s own fresh forecasts, due on Thursday, are expected to echo this pessimism, potentially suggesting an imminent period of stagflation – a challenging combination of stagnant growth and stubbornly high inflation. The consumer prices index (CPI) currently stands at 3.6% for the year to June, significantly above the Bank’s 2% target, underscoring the delicate balance the MPC must strike.