Financial markets have priced in a 100% chance of a Bank of England interest rate cut next month, as the effects of Donald Trump’s evolving trade war continue to play out in the global economy.
LSEG data early on Tuesday had shown an 82% likelihood of a reduction from 4.5% to 4.25% on 8 May.
But the doubt disappeared shortly after remarks on inflation by a member of the rate-setting committee.
Megan Greene, who voted with the majority for a hold at the last meeting in March, told Bloomberg that US trade tariffs are more likely to push down on UK inflation than raise the pace of price increases.
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Her argument is essentially that the UK’s decision not to respond to Trump’s import duties through reciprocal tariffs could make the UK a destination for cheaper goods from Asia and Europe.
“The tariffs represent more of a disinflationary risk than an inflationary risk,” she said, adding: “There’s a ton of uncertainty around this, but there are both inflationary and disinflationary forces.”
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Ms Greene also said that a recent surge in the value of the pound against the US dollar could also help ease inflation but cautioned that it was early days to determine the likely currency path.
The Bank is expecting inflation to rise this year despite a greater than expected dip witnessed in March largely due to the impact of rising energy prices but also the effects of tax rises on businesses from April.
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The trade war is widely tipped to weigh on economic activity globally.
It poses a problem for the Bank as rising inflation curbs policymakers’ ability to help boost growth through interest rate cuts.
The LSEG data further showed that financial markets are expecting three Bank of England rate cuts by the year’s end.
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The Bank’s counterpart for the euro area has been cutting rates at a faster pace as inflation has allowed, due to the dire performance of its collective economy.
Like in the UK, the US central bank has also been taking a cautious approach to rate cuts recently due to the spectre of domestic inflation arising from the Trump trade war.
A perceived failure of the Federal Reserve to address an anticipated growth slowdown, largely arising from the imposition of tariffs, has angered the president.
Mr Trump declared last week that the bank’s chair, Jay Powell, should be fired and demanded a rate cut “NOW” in a social media post.
Chancellor Rachel Reeves is in Washington this week for a series of meetings but is expected to hold discussions with her US counterpart on a trade agreement to nullify the need for US/UK tariffs.
Any rate cut by the Bank of England would be a welcome boost in her push for economic growth in troubled times for the world trade order.
