Bank of England all but certain to cut interest rate – but will they go for ‘bazooka’ option?
By James Sillars, business and economics reporter
All the chatter going into today’s Bank of England interest rate decision had been around one question.
That was: will we get a half percentage point cut?
It was increasingly seen as the potential big bazooka, data-driven, option over the past few weeks.
A growing number of economists and financial market commentators argued that weaker than expected inflation prints covering March, along with evidence of a trade war-led economic slowdown, could allow the Bank to release the safety catch after all the talk of “caution” and “gradual” cuts out of the Bank in March.
LSEG data on Wednesday suggested there was a 9% chance of a reduction from 4.5% to 4% when the rate decision is announced at 12.02pm today (it’s two minutes later than usual due to the VE Day silence).
But that same data showed a shift to just 2% overnight, possibly reflecting reports that Donald Trump will announce, later today, that a trade deal with the UK is imminent.
You would think, naturally, that such a shift would have a heavy influence on the Bank of England’s decision.
But that is very unlikely to be the case because the nine-strong monetary policy committee (MPC) traditionally votes the day before the actual decision is revealed.
That same LSEG data suggests, however, that financial market participants still see a quarter point rate cut as nailed on, largely due to the slowdown-led narrative outlined above.
The half point cut option is far from off the table and could yet receive significant support.
MPC members Swati Dhingra and Catherine Mann backed such a reduction as early as February.
One of the more cautious MPC members, Megan Greene, said just last month that the Trump administration’s tariffs would be expected to cut UK inflation pressures, largely due to the ‘dumping’ of cheaper goods – essentially products flowing away from a punitive US market to others, including the UK.
Rising household bills and businesses passing on higher tax bills had, until the trade war included the UK in early April, been expected to drive inflation beyond 3% this year.
Those factors had threatened to limit the number of rate cuts the Bank could pass on.
Fast forward just a month and all that has changed.
The market is expecting Bank rate to sink to 3.5% by the end of the year.
If proving true, it’s the news borrowers have been waiting for since the battle against inflation gathered speed in 2022.
The financial information service Moneyfacts has the average two-year fixed mortgage deal at 5.16% as of this week, and at 5.09% for the five-year option.
Those rates have eased back from their peaks at a faster pace and exceeded Bank rate reductions to date.
The updated inflation and economic growth projections from the Bank on Thursday will be closely scrutinised for clues on the likely interest rate path ahead.
Both could see hefty downgrades.
If not today, given all the trade war uncertainty, there is every chance of a half point rate cut in June or beyond if that proves true.
The smart money, currently, would be on at least four quarter point reductions by December but, if history tells us anything, you can’t really forecast anything effectively when Donald Trump is in the White House.
