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The Bank of England is likely to cut UK interest rates by a quarter point to 4.25 per cent this week and signal further reductions to come as the uncertainty unleashed by US President Donald Trump’s global trade war hits growth.
The BoE’s Monetary Policy Committee will announce its latest rates decision on Thursday, against a backdrop of mounting concern over the potential for erratic US policy on import taxes to derail the global economy.
BoE governor Andrew Bailey has made it clear that rate-setters think tariffs are likely to depress UK economic activity. But this will be the first time policymakers set out their views on how Trump’s policies are likely to affect inflation and the outlook for rates.
Investors think a quarter-point rate cut this week is now a near certainty, with the potential for one or two MPC members to break with the majority and vote for a bigger 0.5 percentage point cut.
They are betting that the BoE will then follow up with a further three cuts, taking its benchmark rate to 3.5 per cent by the end of the year, down from 5.25 per cent when it began loosening policy last summer.
This would be a faster pace of loosening than the MPC signalled when it last published forecasts in February, saying it planned to take a “gradual and careful” approach to lowering the cost of borrowing.
Economists polled by Reuters are more cautious: they expect the BoE to cut rates to 3.75 per cent by the end of the year. But they also believe that policymakers may now be willing to take a more activist stance.
“We expect it [the MPC] to be clear that the balance of risks has shifted to a less inflationary outlook,” said Jack Meaning, economist at Barclays, adding that the MPC could “open the door to a June cut”, even while avoiding any explicit commitment.
Data published since the MPC met in February will give its nine members some reassurance that inflationary pressures are easing in line with their expectations.
GDP growth at the turn of the year has proved much stronger than policymakers were forecasting, even though the outlook is now darkening.
Meanwhile consumer price inflation — which fell more than expected to 2.6 per cent in March — has come in below the BoE’s February forecasts, including for services prices.
Wage growth, at 5.9 per cent in the three months to February, remains too strong for the BoE’s liking, but the jobs market has softened.
All this could lessen the concern the MPC voiced in February: that blockages on the supply side of the UK economy might explain why activity was stagnant yet price growth still sticky. The overriding concern now will be how the upheaval in global trade changes the inflation outlook.
“The MPC still has a job of work to suppress inflation,” said Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics. “The question is the extent to which Donald Trump’s tariffs will do that job for the MPC.”
Rate-setters have so far been circumspect, although Megan Greene — one of the committee’s more hawkish members — said last week that tariffs were more likely to be disinflationary than inflationary.
Sandra Horsfield, economist at Investec, said that with respect to trade, “virtually everything has pointed in the direction of lower UK inflation pressure”.
This is partly because the intense uncertainty over trade policy is already weighing on activity, making businesses wary of new investment and consumers cautious of spending.
It also reflects expectations of a weaker dollar and lower global energy prices, and the likelihood that Chinese exporters will cut prices as they seek alternatives to US markets.
Analysts are hoping the MPC will make its thinking clearer by updating the scenarios it uses to show how it views the balance of risks to inflation.
The committee said in March that it wanted to explore two scenarios: one in which global and domestic uncertainty weighed more on demand, and one in which strong wage growth continued to fuel prices. But it could also use them to explore the various ways in which trade frictions might play out.
The BoE will still be worried about the potential for price pressures to linger, especially given the short term pick-up in inflation it expects on the back of the sharp increases last month in regulated utility prices.
But Elizabeth Martins, senior economist at HSBC, said rate-setters might now signal that it was open to speeding up the pace of cuts if necessary.
“Carefulness cuts both ways. There is a risk of doing too little, as well as a risk of doing too much,” she said.
Data visualisation by Amy Borrett