Bank of England Poised to Cut Interest Rate Amid Economic Uncertainty

Markets brace for potential half-point “bazooka” cut as UK faces trade war ripple effects and weakening inflation

The Bank of England is widely expected to announce an interest rate cut today, with growing speculation that policymakers may opt for a dramatic half-point reduction. As inflation slows and global economic headwinds mount, all eyes are on the central bank's next move.

Will the MPC Pull the Trigger on a Half-Point Cut?

For weeks, economists have debated whether the Bank would opt for a bold, data-driven 0.5% interest rate cut—dubbed the “bazooka” option. Softer-than-expected inflation figures for March and evidence of a trade war-driven economic slowdown have strengthened the case for more aggressive action.

While LSEG data initially showed a 9% chance of a half-point cut—from 4.5% to 4%—that number dropped to just 2% overnight. The shift is likely tied to reports that US President Donald Trump will soon announce a major UK trade deal, potentially offering a boost to Britain’s outlook.

Markets Expect a Quarter-Point Cut

Despite the diminishing odds of a larger cut, financial markets remain firmly confident that a 0.25% rate cut is all but guaranteed. That expectation is based on a shift in sentiment from the Bank’s own language, which has softened from “caution” to “gradual easing” in recent weeks.

Several members of the Monetary Policy Committee (MPC), including Swati Dhingra and Catherine Mann, have previously backed deeper cuts, indicating internal support exists for bolder action. However, the Bank traditionally votes the day before announcing the decision, meaning last-minute developments—such as the Trump-UK trade deal—may not factor in.

Trade War May Ease Inflation Pressures

Caution from some MPC members has been shaped by earlier expectations of rising inflation, fuelled by increased household bills and tax burdens. But April’s escalation in the US-led trade war—now involving the UK—has reshaped those forecasts.

MPC member Megan Greene has noted that Trump’s steep tariffs on China could lead to the UK receiving an influx of cheaper goods, a phenomenon known as "dumping". This would reduce inflationary pressure and give the Bank more room to cut rates without overheating the economy.

Rate Cuts Could Provide Mortgage Relief

Markets are now pricing in a Bank Rate as low as 3.5% by year-end, offering a welcome reprieve for borrowers. Mortgage rates have already been declining, with Moneyfacts reporting an average two-year fixed deal at 5.16% and five-year deals at 5.09%—down from recent highs and outpacing current Bank Rate cuts.

Conclusion: A Turning Point for UK Monetary Policy?

Whether or not the Bank of England opts for a dramatic half-point cut today, the message is clear: rate reductions are firmly back on the table. With global trade uncertainty, softening inflation, and a possible US trade deal in play, markets are preparing for a dovish shift in monetary policy.

One thing is certain: 2025 could mark a significant turning point for the UK economy—and the decisions made today will shape the path ahead.

Sources: (BBC.co.uk, SKY.com)