The Bank of England is expected to reduce UK interest rates by 0.25 percentage points to 4.25% this week, as concerns over global trade tensions continue to cloud the economic outlook. The central bank is also likely to signal that further rate cuts may follow.
The Monetary Policy Committee (MPC) will announce its decision on Thursday, at a time when unpredictable developments in international trade policy are seen as a major risk to global and domestic economic stability.
Governor Andrew Bailey and other policymakers have indicated that trade barriers are dampening economic activity. This week’s meeting will be the first opportunity for the committee to detail how these trade dynamics could influence inflation and the future path of interest rates.
Market participants are almost certain a rate cut is coming, with some expecting dissent within the MPC in favour of a larger 0.5 percentage point cut. Investors also anticipate the base rate could fall to 3.5% by year-end, continuing the monetary easing that began last summer from 5.25%.
This would mark a quicker pace of rate reductions than the MPC had originally forecast in February, when it emphasised a "gradual and careful" strategy for lowering borrowing costs.
Economists surveyed recently are slightly more cautious, predicting the rate will reach 3.75% by the end of the year. However, there is a growing view that the MPC is becoming more willing to act decisively if economic conditions warrant it.
One economist noted that the balance of risks has shifted toward lower inflation, suggesting the committee could open the door to another rate cut as early as June, even if it stops short of explicitly committing.
Recent data is likely to reinforce the MPC’s confidence that inflationary pressures are easing. GDP growth at the start of the year exceeded expectations, though prospects for the remainder of the year are less optimistic.
Consumer price inflation, which dropped more than expected to 2.6% in March, has come in below forecasts—particularly in services. Wage growth remains elevated at 5.9% but the labour market has shown signs of cooling.
These developments could help ease the MPC’s earlier concerns that supply-side constraints were the reason for stubbornly high prices despite sluggish activity. Now, the dominant issue is how global trade disruptions will shape inflation trends moving forward.
Some committee members have acknowledged that trade-related uncertainty may have a disinflationary effect, particularly if it suppresses investment and consumer spending. Expectations of a weaker dollar, lower energy prices, and discounted goods from export-driven economies could also contribute to downward pressure on prices.
Analysts are looking for the MPC to provide greater clarity by updating its modelling scenarios to reflect the evolving global risks. The committee previously said it would explore contrasting situations: one where demand weakens due to uncertainty, and another where strong wage growth continues to drive inflation.
Despite a likely short-term rise in inflation from utility price increases, the Bank remains focused on medium-term price stability. Some economists believe the MPC may now be more open to accelerating the pace of rate cuts if conditions deteriorate further.
“There’s a balance to strike,” one analyst commented. “The risk isn’t just in acting too aggressively—it’s also in acting too slowly.”
www.sbadvisors.co.uk
Comments
Post a Comment