Bank of England policymakers are widely expected to cut interest rates this week to prevent the economy sliding backwards amid rising unemployment and the hit to global trade from Donald Trump’s fresh round of import tariffs.
City traders are betting that the Bank’s nine-member monetary policy committee (MPC) will reduce the headline rate on Thursday by 0.25 percentage points to 4%, marking the fifth cut since last August and taking interest rates back to where they were in March 2023.
Financial markets have put the chance of a reduction at the August meeting at more than 80% and are pencilling in a further quarter-point reduction before the end of the year.
The chancellor, Rachel Reeves, will welcome the move, which will push down mortgages rates and cut the cost of borrowing for cash-strapped businesses.
However, the decision is likely to illustrate the difficult situation confronting the UK as the government struggles to boost growth while trying to limit Whitehall spending before the autumn budget.
The economy shrank in May by 0.1% and in April by 0.3%, which many economists blamed on the uncertainty caused by Trump’s tariffs and extra business taxes in last October’s budget, which came into effect in April.
In a sign of weaker growth over the next year, the number of vacancies fell below its pre-pandemic level and the unemployment rate rose to 4.7% in the three months to May, reaching the highest level since June 2021.
Trump has signed a trade deal with the UK capping tariffs on most goods to 10%, but on Friday the US president announced extra import tariffs on trading partners of up to 50%, harming global growth.
The International Monetary Fund (IMF) recently said the UK economy would struggle to expand by more than 0.1% in the third and fourth quarters of the year, before a slight increase in the quarterly growth rate to 0.3% next year.
The MPC will publish fresh forecasts on Thursday that could prove to be even gloomier, indicating that a period of stagflation is imminent, brought on by a slowdown in growth over the next year while inflation remains high.
The consumer prices index (CPI) increased by 3.6% in the year to June, according to the latest official figures, well above the MPC’s 2% target.
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Matt Swannell, chief economic adviser to the EY Item Club said an increase in vacancies and higher unemployment showed the labour market was weakening while pay growth had cooled more quickly than the Bank of England’s May forecast.
But he forecast a split in the MPC vote after a jump in food inflation in June.
“Signs of lingering price pressures will mean the committee remains cautious, with two of the hawkish MPC members expected to favour no change,” he said.
Inflation has risen by more than the Bank of England expected three months ago after significant increases in the cost of some basic items such as meat and butter.
“The increase in food prices is particularly important to the MPC as it feeds through to households’ inflation expectations – one of the committee’s key gauges around the risk of inflation persistence,” Swannell added.
https://www.theguardian.com/business/2025/aug/03/bank-of-england-interest-rates-cut-forecast-rising-unemployment-and-trump-tariffs