Bank of England interest rate cut ‘almost certain’ after poor growth
Fresh growth figures have fuelled speculation of an August interest rate cut in a bid to give the waning UK economy a shot of life.
The Office for National Statistics (ONS) revealed on Friday the UK economy shrunk for the second consecutive month with a 0.1 per cent contraction in May.
Deutsche Bank’s chief economist Sanjay Raja said a rate cut when the Monetary Policy Committee meets on August 7 was “almost certain” with “more to come” in the final quarter of the year.
The Bank of England has gradually taken the chop to rates since they hit a post financial crisis high of 5.25 per cent but external factors have led to a sluggish pace.
In June, the MPC held rates to “squeeze out persistent inflationary pressures” as tensions between Israel and Iran risked an uptick in energy prices.
But economists are now banking on another cut.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Headline GDP disappointed, which will keep the market pricing a high probability of an MPC rate cut in August.”
Wood said consumer price index and labour market data, pencilled in for next week, were “the only barriers” to a rate reduction.
MPC split as rates fall
The vote to hold in June came despite three of nine rate-setters – external members Swati Dhingra, Alan Taylor and deputy governor Dave Ramsden – voting for a 25 basis point cut, indicating tension amid the MPC.
The last cut in May, which took rates to 4.25 per cent, split hawks and doves with Dhingra and Taylor lobbying for a 50 basis points cut, whilst chief economist Huw Pill and Catherine Mann opted to hold.
The Bank has also retained its “careful and gradual” approach to monetary policy amid geopolitical tensions brought on from President Donald Trump’s tariff onslaught and conflict in the Middle East.
Ellie Henderson, economist at Investec, said: “We expect GDP to continue to expand, although we do not imagine the pace of growth will be breaking any records anytime soon>”
Henderson added: “Falling interest rates look set to support activity but a looser market is likely to constrain activity”.
Investec pencilled in the Bank rate “eventually settling” at three per cent in the second half of 2026.