The specter of stagflation looms large over the UK economy, prompting widespread predictions that the Bank of England will cut interest rates this Thursday. A quarter-point reduction to 4% is widely anticipated, a move aimed at bolstering an economy struggling with rising unemployment and the disruptive force of new US tariffs. This would be the fifth rate cut since last August, signalling a proactive stance by the central bank.
The Chancellor, Rachel Reeves, is expected to welcome the lower borrowing costs for homeowners and businesses that such a cut would bring. However, the government faces a formidable challenge in stimulating growth while simultaneously managing public spending. The UK economy has already contracted in May and April, a slowdown attributed in part to the uncertainty caused by Donald Trump’s trade policies and the impact of recently implemented business taxes.
Evidence of a weakening labor market is also mounting, with job vacancies falling below pre-pandemic levels and the unemployment rate reaching a four-year high of 4.7% in the three months to May. These trends underscore the urgent need for measures to prevent a deeper economic slump.
Despite a specific trade agreement with the UK, President Trump’s broader imposition of additional tariffs of up to 50% on other trading partners is casting a shadow over global growth, with inevitable repercussions for the UK. The International Monetary Fund’s cautious outlook for the UK economy, projecting only marginal expansion for the latter half of the year, further reinforces the difficult environment. The Bank of England’s fresh forecasts, to be unveiled on Thursday, are expected to be equally cautious, potentially confirming the growing risk of stagflation, with inflation (CPI at 3.6%) remaining stubbornly high despite weakening growth.