(Commonwealth_Europe) Speculation is building around the likelihood of further interest rate cuts by theBank of England later this year. However, lingering concerns remain, particularly due to persistent inflation that continues to sit above the Bank’s target of 2% and rising global economic tensions, including an escalating tariff war that could have far-reaching implications.
According to figures released by the Office for National Statistics (ONS), the UK’s inflation rate dropped for the second consecutive month in March, easing to 2.6% from 2.8% in February. This decline, attributed largely to falling fuel prices, was sharper than most economists had anticipated—many had forecast a smaller drop to 2.7%. The surprise downturn in inflation could strengthen the case for a rate cut in the Bank of England’s next policy meeting, with market participants increasingly expecting a quarter-point reduction in May.
Despite the recent cooling, inflation is still not fully under control. It remains above the 2% benchmark set by the central bank, and there are expectations that it may spike again in April due to several domestic pressures, notably rising energy bills. Even so, the broader trajectory of inflation appears to be less severe than previously feared. Analysts point to external factors, such as the impact of U.S. trade policies under Donald Trump, as influencing this outlook. Trump’s increasingly protectionist stance has triggered a tariff war that is expected to put downward pressure on global demand and commodity prices, especially oil, thereby easing inflationary pressures worldwide.
With inflation moderating, albeit unevenly, many economists now believe that the Bank of England has some leeway to further ease borrowing costs. Since last August, the bank has lowered its key interest rate from a 16-year peak of 5.25%, implementing three quarter-point cuts, most recently in February. Currently, the base rate stands at 4.50%, and expectations for another cut are high, with market odds suggesting an 85% probability of a reduction in May.
Luke Bartholomew, deputy chief economist at Aberdeen, noted that the case for easing monetary policy is becoming increasingly compelling. He described a May rate cut as “nailed on” and suggested that additional cuts later in the year were likely. However, not everyone shares this confidence. Inflation is proving to be “sticky,” with core pressures, including rising wages, keeping it above the target range. Wages are currently growing at around 6%, supporting consumer spending and contributing to real income growth. But the situation also raises the risk that inflation will remain entrenched, complicating the bank’s decision-making.
Webull UK CEO Nick Saunders cautioned that the market might be overestimating its potential. “Traders are pricing in three or four cuts by the end of the year, but stubborn inflation throws this into doubt,” he said. He also highlighted the unpredictable effect of a global tariff war, suggesting that it could paradoxically benefit the UK by bringing in cheaper goods from Asia and Europe, especially if exporters are forced to seek new markets. Such a shift could also influence the domestic labour market by increasing competition and moderating wage pressures.
Danni Hewson, head of financial analysis at AJ Bell, offered a cautiously optimistic take. She emphasized that while inflation remains above target, it is still low enough to justify further monetary easing. However, she cautioned that the path forward could be uneven. Upcoming inflation data may reflect a spike in household costs, which could complicate the Bank’s roadmap. At the same time, global uncertainties—including continued weakness in oil prices and possible changes in trade flows caused by Trump’s tariff policies—may help keep inflation in check. Domestic challenges, such as rising labour costs, could also lead to a slowdown in hiring and dampened wage growth, potentially reducing inflationary pressure in the longer term.
Despite the positive short-term outlook for interest rate cuts, especially after March’s unexpectedly low inflation reading, the Bank of England must navigate a challenging balance. Global economic instability, volatile energy markets, and persistent domestic inflation all remain on the radar. How the central bank navigates these pressures will depend heavily on how inflation behaves in the months ahead and whether the broader economic backdrop continues to shift in ways that support easing.
