UK Rate Cut Imminent: Bank of England Responds to Economic Squeeze

The Bank of England is widely anticipated to cut its benchmark interest rate this Thursday, with City traders strongly predicting a quarter-point reduction to 4%. This move, which would mark the fifth cut since last August, comes amidst a tightening economic squeeze on the UK, characterized by rising unemployment and the disruptive force of new import tariffs from the US. The decision reflects a concerted effort by policymakers to prevent a further slide in the nation’s economic health.
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 faces a formidable challenge in stimulating growth while simultaneously reining in public spending before the autumn budget. 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.
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. The International Monetary Fund (IMF) has also painted a cautious picture, projecting minimal UK expansion for the latter half of the year.
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, well above the MPC’s 2% target. The complex interplay of global trade pressures, domestic economic weakness, and persistent inflation creates a difficult environment for policymakers.