BoE ready to cut again as UK braces for trade war impact

The Bank of England is nearly certain to cut rates on Thursday, hoping to get ahead of a U.K. economic slowdown brought on by U.S. trade tariffs.

Analysts expect the Bank’s Monetary Policy Committee to lower the Bank Rate to 4.25 percent from 4.5 percent, which would represent the fourth such cut in the last 12 months.

The MPC had voted to keep rates steady at its March meeting, but the potential economic fallout from the U.S.’s wide-ranging tariffs announced on April 2 have bolstered the case for greater action to support the economy.

At the International Monetary Fund’s spring meeting last month, Bank of England Governor Andrew Bailey said he was focused on the “growth shock” that may come as a result of the tariffs.

The IMF said at the time it expects Britain’s economy to only grow 1.1 percent this year as a result of the trade disruption, down from a previous estimate of 1.6 percent.

“Donald Trump’s tariffs have caused a massive reappraisal of the future path of U.K. interest rates,” Laith Khalaf, head of investment analysis at AJ Bell, wrote in a note to clients on Wednesday. “As things stand, markets are focusing on the collateral damage to the U.K. economy rather than the potential for a trade war to ignite inflation once again.”

Khalaf noted that markets are pricing in a 50 percent chance that, by December, the Bank Rate will be at least 1 percentage point lower than where it stands now. That would represent a clear acceleration in the pace of policy easing, given that so far, the BoE has only cut once a quarter.

Deutsche Bank senior economist Sanjay Raja said he expects the Bank to stop referring to the likely course of policy easing as “gradual” and instead say that “the ‘scale and pace’ of any rate cuts would be conditional on the economic outlook.”

That assumption faces at least one significant hurdle, however. While prices for trades goods and services may weaken as the economy slows, the prices of services controlled by the government are under serious upward pressure.

Water bills rose by an average of 26 percent nationwide at the start of April, while regulated household energy bills rose 6.4 percent and council tax bills rose by between 5 percent and 10 percent.

All that is likely to stop any further improvement in services inflation, which has been the BoE’s bugbear for the last couple of years. Despite easing in recent months, it still stood at 4.7 percent in March.

However, the clinching factor for the Bank may be the pound: Since the U.S. tariff dump, it has defied expectations of fresh declines, rising 4.5 percent against the dollar. That is helping to keep the cost of key imports down — especially oil.

Crude oil prices have fallen to four-year lows even in dollar terms, due to a combination of weak global demand and a big rise in output from OPEC and its allies, scheduled for June.

Silver linings

Fortunately for the Bank, economic data since the start of the year has generally surprised on the upside after effectively stagnating for the last two quarters.

Strong February and preliminary March figures point to growth of more than double the MPC’s forecast of 0.1 percent in the first quarter, Deutsche’s Raja.

There’s good news on the labor market front as well. Wage growth has been falling faster than the Bank expected, but without any dramatic uptick in redundancies.

“[W]hile 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,” wrote James Smith, an economist at Dutch bank ING.