Borrowing costs across the UK are set to fall as the Bank of England prepares for an anticipated interest rate cut this Thursday, a direct response to a raft of weak economic data. A quarter-point reduction to 4% is widely expected, marking the fifth cut since last August, driven by concerns over rising unemployment and the economic drag from new US tariffs. Financial markets are pricing in an over 80% chance of this August rate reduction.
The Chancellor, Rachel Reeves, is expected to welcome the lower mortgage rates and reduced borrowing costs for businesses that this cut would bring, offering some immediate financial respite. 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 economic uncertainty stemming from Trump’s tariffs and the recent implementation of new business taxes.
Further evidence of economic fragility comes from the labor market, where job vacancies have fallen below pre-pandemic levels and the unemployment rate has risen to 4.7% in the three months to May, marking a four-year high. These figures underline the urgency of supportive monetary policy.
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.