Four interest rate cuts this year pencilled in by markets
Markets are betting that the Bank of England will make up to four interest rate cuts this year, double what had been predicted in late March.
President Trump’s tariffs are set to drag UK growth back by up to one percentage point, according to various forecasters, while their impacts on inflation remain ambiguous, leading investors to re-evaluate their predictions for Bank of England interest rate cuts.
But investors across the City of London priced in as much as 88 base points in cuts over Monday, suggesting that there will be four Bank of England interest rate reductions this year.
The Bank’s current inflation rate projection stands at a peak of 3.75 per cent in 2025. It held interest rates at 4.5 per cent in March.
The next Monetary Policy Committee decision is expected in early May before five more meetings are scheduled this year.
Some economists, including rate-setter Swati Dhingra, have said that the sweeping tariffs may have disinflationary effects on goods in the UK.
James Smith, an economist at ING, said previous interest rate cut predictions were “conservative” as markets were now considering how the Bank may react to slower growth brought by tariffs and Labour’s tax policies.
“There will be more focus on growth as a result of this,” Smith told City AM.
“One of the things they will really be looking at is the redundancy numbers after the national insurance hike.”
“If we were to see a rise in redundancies, that has the potential to be a bigger game changer,” he said.
Smith suggested that the high inflation remains the “fear of the hawks” at the Bank around two years after inflation hit a peak of 11 per cent.
“I think [policymakers] are minded, when they are confronted with stagflation, to focus more on inflation.”
Economists and investors predicting lower inflation for the UK attribute their estimates to the possible inflow of cheaper items into the UK as countries such as China continue to produce large quantities of goods.
But Rob Wood and Elliot Jordan-Desk of Pantheon Macroeconomics said new trade barriers could keep inflation high.
“The UK government looks likely to apply quotas and other restrictions to prevent other countries hit hard by US tariffs from dumping low-cost products in the UK and damaging domestic producers,” they said.
“Non-tariff barriers to trade are inflationary too, and other countries will do the same.”
The consultancy Capital Economics believes there will be two interest rate cuts this year but added that tariffs make it less likely that rates will be held.
“It’s fair to say that the extra downside risks to economic growth caused by Trump’s tariffs may make the Bank more inclined to cut interest rates three times this year. But the uncertain influence on inflation from tariffs may mean the Bank can’t conclude that the inflation risks have faded,” Ashley Webb told City AM.