The Bank of England’s Monetary Policy Committee (MPC) is set to convene on Thursday, with widespread expectations of a quarter-point cut to the base interest rate, bringing it down to 4%. This anticipated reduction, the fifth since last August, aims to counter a weakening economy, marked by rising unemployment and the negative repercussions of new tariffs imposed by Donald Trump. Financial markets are largely betting on this move, with an over 80% chance of a cut this month and further reductions eyed for later in the year.
The Chancellor, Rachel Reeves, is poised to welcome this decision, which is expected to provide some relief to households through lower mortgage rates and businesses struggling with borrowing costs. However, the broader economic picture remains complex and challenging for the UK government, which is attempting to boost growth while simultaneously reining in public expenditure ahead of the upcoming autumn budget. The economy has contracted for two consecutive months, shrinking by 0.1% in May and 0.3% in April, a trend many economists link to the uncertainty surrounding Trump’s trade policies and new business taxes.
The latest labor market data further underscores the economic fragility. Job vacancies have fallen below pre-pandemic levels, and the unemployment rate has climbed to 4.7% in the three months to May, reaching its highest point in over four years. This weakening labor market, combined with the broader global trade tensions ignited by Trump’s additional tariffs on trading partners, presents a significant headwind to economic recovery.
The International Monetary Fund’s recent assessment adds to the cautious outlook, projecting very limited UK economic expansion for the remainder of the year before a slight uptick in 2026. The Bank of England’s own updated forecasts, to be released alongside the rate decision, are expected to be even more sombre, potentially highlighting an imminent period of stagflation – a concerning combination of slow growth and persistent high inflation, currently at 3.6% CPI, well above the 2% target.