The Bank of England is preparing to raise interest rates come this Thursday. This shift is meant to address what’s projected to be an economic downturn in the United Kingdom, largely fueled by U.S. trade tariffs. Capital Economics is among analysts to widely predict that the central bank will cut the Bank Rate. They forecast it to go down from 4.7 percent to just above 4.25 percent.
This looming determination is a direct result of Donald Trump’s tariffs. Yet, these tariffs have been met by the most drastic reconsideration of the trajectory of U.K. interest rates as a result. The MPC has forecast a weak growth rate of only 0.1 percent for the first quarter. More recently, February numbers indicate an annualized rate of growth that blows the MPC’s forecasts out of the water. Preliminary data from March supports this trend, suggesting an increasingly bifurcated economic picture.
Despite all of these positive signs, the Bank has a number of hurdles to overcome in its attempt to spur growth. The single biggest hurdle we have in our path is the crashing crude oil prices. They have already fallen to four year lows due to the weakness in global demand and increasing production from OPEC and allies. This output increase is scheduled to be implemented in June and will likely do even more to alleviate inflationary pressures.
Analysts have noted that markets currently reflect a 50 percent probability that the Bank Rate could decrease by at least one percentage point by December. The expected rate cut is aimed at reducing the economic pressure on families. Recently, households have faced an additional 26 percent increase in their water bills. Energy costs regulated by the PUC have increased 6.4 percent since the beginning of April. Further, council tax bills have increased by anywhere from 5 percent to 10 percent in many places, making the bills even more burdensome on families’ budgets.
As economist James Smith noted recently about life in today’s job market, “
“While the jobs market is getting cooler, we’re not seeing any of the classic warning signs you’d normally start to see in a recession.”
This announcement highlights the conflicting forces at play in our economy as the Bank works through its monetary policy strategy. Laith Khalaf, a financial analyst at AJ Bell, noted the importance of international trade relations and their effect on domestic economic forecasting. He remarked,
“Donald Trump’s tariffs have caused a massive reappraisal of the future path of U.K. interest rates.”
The Bank of England emphasizes that any decisions regarding the scale or pace of potential rate cuts will depend heavily on forthcoming economic indicators. As pointed out by Sanjay Raja, a senior economist from the economic consultancy Moody’s Analytics,
“the ‘scale and pace’ of any rate cuts would be conditional on the economic outlook.”
The Bank looks to be preparing for that inevitability, with their next meeting. It is paying close attention to relevant developments at home and abroad that could affect its policy choices. The impact of recently implemented tariffs and volatile oil prices will probably loom large over the debates.
Leave a Reply