Responding to signs of cooling pay growth in the UK labor market, the Bank of England is widely expected to cut interest rates this Thursday. A quarter-point reduction to 4% is anticipated, marking the fifth cut since last August, a move also driven by rising unemployment and the economic impact of Donald Trump’s fresh round of import tariffs. Financial markets are expressing strong confidence in this decision, with over an 80% probability for the August meeting.
Chancellor Rachel Reeves is set to welcome the rate reduction, as it is expected to ease the financial burden on households through lower mortgage rates and provide much-needed relief for businesses struggling with borrowing costs. However, the government’s dual challenge of boosting growth while reining in spending remains. The UK economy shrank by 0.1% in May and 0.3% in April, a contraction largely attributed by economists to the uncertainty stemming from Trump’s tariffs and the recent implementation of new business taxes.
The latest labor market data, including a decline in job vacancies and a rise in unemployment to 4.7% in the three months to May, alongside cooling pay growth, suggests a weakening of inflationary pressures from the wage side. This strengthens the case for a rate cut to stimulate economic activity.
Despite a UK-specific trade deal, President Trump’s broader announcement of substantial tariffs on other trading partners is creating headwinds for global trade and, consequently, for UK economic growth. The International Monetary Fund’s subdued forecast, projecting minimal UK expansion for the latter half of the year, adds to the cautious outlook. The Bank of England’s updated forecasts, due on Thursday, are expected to reinforce these concerns, potentially indicating an imminent period of stagflation – a challenging scenario of slow growth combined with stubbornly high inflation, which currently sits at 3.6% CPI.