A recent jump in food inflation is complicating the Bank of England’s decision-making, though a quarter-point interest rate cut to 4% is still widely expected this Thursday. While rising unemployment and the impact of Donald Trump’s tariffs are pushing for a cut, the increase in food prices has raised concerns among some MPC members, potentially leading to a split vote. This would be the fifth rate cut since last August.
The expected rate reduction is aimed at providing relief to households through lower mortgage rates and supporting struggling businesses. Chancellor Rachel Reeves is poised to welcome the move. However, the UK economy contracted in May and April, a downturn many economists link to the uncertainty created by Trump’s trade policies and the implementation of new business taxes.
The labor market is also showing clear signs of weakness, with job vacancies falling below pre-pandemic levels and the unemployment rate rising to 4.7% in the three months to May, its highest since June 2021. These indicators of a slowing economy are a key factor in the Bank’s decision-making, despite the inflationary pressures.
President Trump’s announcement of new tariffs of up to 50% on various trading partners, despite a separate UK-US trade deal, is exacerbating global trade tensions and impacting the UK’s growth prospects. The International Monetary Fund’s modest forecast for the UK economy, predicting only slight expansion in the coming quarters, further highlights the precarious situation. The Bank of England’s fresh forecasts, to be unveiled on Thursday, are expected to be even more cautious, potentially indicating an imminent period of stagflation, where inflation persists despite subdued growth.
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