The Bank of England is expected to lower its interest rates this Thursday due to the impacts on UK employment and economic growth caused by Donald Trump’s unpredictable actions in the global trade arena.
This would be the Bank’s initial response following the announcement of Trump’s aggressive tariff policies on “liberation day,” which have significantly disturbed the global economy. The anticipated adjustment would see the primary rate decreased from its current 4.5%.
Predictions of a Quarter-Point Rate Cut
Financial circles are almost certain that the Bank will implement a quarter-point rate cut. Nonetheless, certain financial experts, including a past deputy governor of the Bank, suggest that a more substantial reduction of half a point is necessary to support businesses and consumers amidst a rapidly deteriorating global financial outlook.
Analysts have expressed concerns that Trump’s trade policies could severely decelerate global trade and impose additional costs on American consumers by inflating prices and increasing the likelihood of a recession.
Moreover, the unpredictability of Trump’s trade strategies has significantly eroded business and consumer confidence not only in the United States but globally, including in the UK, potentially undermining economic activities worldwide.
Impact on UK and Global Economic Prospects
According to Edward Allenby, a UK economist at Oxford Economics, the growth prospects for the UK were already under strain, and the recent tariff announcements by the US have further compounded these economic challenges. He predicts that a rate cut in May is virtually guaranteed and suggests that the Monetary Policy Committee (MPC) might adopt a less conservative approach to rate adjustments moving forward.
In an eventful week for central banks across the Atlantic, financial markets anticipate that the US Federal Reserve will resist Trump’s harsh criticism and maintain its interest rates during its Wednesday meeting. Previously, Trump had harshly criticized Fed Chair Jerome Powell, calling him a “major loser” and demanding his quicker dismissal, although he later moderated his stance concerning the independence of the central bank amid turmoil in the bond markets.
Economists note that while Trump’s tariffs could potentially drive inflation, they might also reduce it in other nations by causing goods intended for the US to flood other markets, thereby reducing prices and alleviating inflationary pressures. Evidence of this effect is already visible in decreased trade volumes and a significant drop in container shipping between the US and its major trading partners.
Broader Economic Indicators and Bank of England’s Stance
In the UK, inflation unexpectedly fell to 2.6% in March, and labor market data indicates that businesses are scaling back on hiring amid increased taxation and lower consumer confidence. Despite expectations of inflation reaching 3.7% this summer due to higher energy and food prices, some analysts believe that the current elevated interest rates and concerns over Trump’s tariffs justify more aggressive cuts in borrowing costs.
Andrew Bailey, the Governor of the Bank of England, highlighted at the International Monetary Fund meetings last month in Washington that the UK economy is facing a “growth shock” due to Trump’s policies. Consequently, the IMF has revised its 2025 growth forecast for the UK downward to 1.1% from a previously expected 1.6% before the tariffs were announced.
Some members of the Bank’s rate-setting MPC, including external economist Swati Dhingra who has been a proponent of significant rate cuts, might advocate for a larger reduction. Financial analysts at Morgan Stanley have indicated that a half-point cut could disrupt their forecast for successive quarter-point reductions leading to a rate of 3.25% by year’s end.
They argue that given the weak labor market and the potential for a substantial global economic downturn, there is little justification for maintaining the UK’s interest rates as high as 4.5%, advocating for a reduction closer to 3.5% sooner rather than later.
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