Bank of England Poised for Fifth Rate Reduction as UK Stagnates

The Bank of England’s Monetary Policy Committee (MPC) is widely expected to enact its fifth interest rate reduction since last August this Thursday, bringing the base rate down to 4%. This anticipated quarter-point cut is a direct response to signs of stagnation in the UK economy, including rising unemployment and the adverse impact of Donald Trump’s fresh round of import tariffs. Financial markets are heavily betting on this move, with over an 80% chance of a cut at the August meeting.
The reduction will be a welcome development for Chancellor Rachel Reeves, as it promises to alleviate financial pressures on households through lower mortgage rates and offer crucial support to businesses grappling with high borrowing costs. Yet, the broader economic context remains challenging for the UK government, which is striving to boost growth while limiting Whitehall spending. The economy contracted in May by 0.1% and in April by 0.3%, a downturn many economists link to the uncertainty caused by Trump’s tariffs and new business taxes.
The labor market, too, shows clear signs of strain. The number of available jobs has decreased, dropping below pre-pandemic levels, while the unemployment rate has risen to 4.7% in the three months to May – the highest it has been since June 2021. This weakening employment picture adds urgency to the Bank’s decision.
Despite a previously signed trade deal with the UK, President Trump’s recent announcement of up to 50% tariffs on other trading partners threatens to disrupt global trade and further impede the UK’s economic growth. The IMF’s subdued forecasts for the UK economy, with minimal expansion predicted for the latter half of the year, further highlight the precarious situation. The Bank of England’s new forecasts on Thursday are expected to confirm a challenging period ahead, potentially indicating a prolonged phase of stagflation with high inflation (3.6% CPI) and subdued growth.