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Markets certain Bank of England will cut interest rates next month
Financial markets now fully anticipate that the Bank of England will lower interest rates in May, driven by the evolving global economic impact of Donald Trump’s trade policies. On Tuesday, LSEG data initially showed an 82% probability of a rate cut from 4.5% to 4.25% on 8 May. However, that probability quickly rose to 100% after remarks from Megan Greene, a member of the Monetary Policy Committee.
Greene, who supported holding rates steady in March, stated that US-imposed tariffs are likely to reduce UK inflation rather than accelerate it. She explained that the UK's refusal to impose retaliatory tariffs could lead to an influx of cheaper goods from Asia and Europe. This disinflationary pressure, combined with the recent strengthening of the pound against the dollar, might help ease inflationary trends—though Greene warned that the currency's future remains uncertain.
Despite a temporary dip in March, inflation is still projected to rise this year, influenced by increasing energy prices and new business taxes introduced in April. Nonetheless, Trump’s trade war is expected to dampen global economic activity, complicating central banks' ability to cut rates while inflation remains a concern.
Markets are now pricing in three rate cuts from the Bank of England before the end of the year. Meanwhile, the European Central Bank has already adopted a more aggressive rate-cutting strategy due to its weaker economic conditions.
In contrast, the US Federal Reserve has been more cautious, amid concerns that Trump's tariffs could drive domestic inflation. Trump has voiced frustration with the Fed’s approach, even suggesting that Fed Chair Jay Powell be dismissed and demanding immediate rate cuts.
UK Chancellor Rachel Reeves is currently in Washington to meet US officials, with trade discussions likely to address tariff-related tensions. A rate cut by the Bank of England would support her broader efforts to stimulate growth amid increasing global economic uncertainty.
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