Bank of England Poised to Cut Interest Rates Despite Sticky Inflation

Weaker labour market and economic uncertainty drive expected rate cut

The Bank of England is widely expected to announce a 0.25% cut to the UK base interest rate today, despite inflation remaining stubbornly above the target level. Analysts and market watchers anticipate the decision will bring the base rate down to 4.0% — a response not to falling inflation, but to growing signs of economic softening.

Inflation Still Running Hot

Despite hopes earlier in the year for a more significant retreat in inflation, the Consumer Prices Index (CPI) currently stands at 3.6%, well above the Bank's long-standing 2% target. Some economists warn it could climb back to 4% in the coming months. On this basis, a rate cut might seem counterintuitive.

However, the Bank is not reacting to inflation alone. Its broader economic outlook, particularly concerning employment and business activity, is showing more cracks than confidence.

Labour Market Weakening

The UK job market is showing signs of strain. Wages have begun to grow at a slower pace, and the unemployment rate is creeping upward — developments that ease fears of a wage-price spiral but raise concerns about the health of the wider economy.

These trends are being partly driven by two major pressures:

• The Chancellor’s new business tax policies, introduced in April, which have increased costs for employers.
• Continued uncertainty fuelled by global trade tensions, particularly stemming from renewed actions by Donald Trump in the US, which have unsettled international trade flows and investment plans.

Gradual Approach Expected to Continue

Despite rising prices, the Bank of England is expected to stick to a measured and cautious pace of rate reductions. Financial markets, according to LSEG data, are betting on one rate cut per quarter, with the next likely before the end of the year.

The Bank’s policy committee is likely to maintain this "gradualist" approach unless inflation suddenly veers off its current trajectory or external economic shocks intensify.

Updated inflation and economic forecasts from the Bank are due alongside today’s decision. While they may show incremental progress, they are not expected to shift the Bank’s broader messaging — which remains centred on risk management and steady easing.

What This Means for Households and Businesses

For households, today's expected rate cut could eventually ease mortgage and borrowing costs, although the impact will be felt slowly. For businesses, particularly those still struggling with post-tax policy adjustments, the decision could provide some relief and support investment sentiment through the remainder of the year.

Conclusion: A Balancing Act in Uncertain Times

The Bank of England’s expected rate cut reflects a difficult balancing act: fighting persistent inflation while trying to prevent a broader economic downturn. With rising unemployment, subdued wage growth, and shaky business confidence, the Bank is clearly signalling that supporting economic activity now outweighs the need for aggressive inflation control.

If global uncertainty continues — especially surrounding trade and political risk — the gradual rate-cutting cycle is likely to continue well into 2026.

Investors, borrowers, and businesses should prepare for a slow but steady loosening of monetary policy, with the next few quarters critical in determining how far and fast the Bank can go.

Source: (SKYmoney.com)