The Bank of England may cut interest rates by 25 basis points this week, with loose budget and Trump's election victory as key variables.

The Bank of England is expected to cut interest rates by 25 basis points to 4.75% at its meeting this Thursday, marking the second rate cut following an unexpected slowdown in inflation. However, this decision is complicated by the dual impact of the UK budget and the victory of Trump in the US election, making the future trajectory of borrowing costs uncertain. It is anticipated that the Monetary Policy Committee's vote will almost unanimously support a rate cut, but the uncertainty surrounding the budget announcement and the US election results may increase the uncertainty of rate movements. The Bank of England's decision will be announced at 12 noon London time, followed by a press conference hosted by Governor Andrew Bailey. The Bank of England's interest rate decision is influenced by two major factors at home and abroad. Firstly, UK Chancellor Rishi Sunak announced one of the largest fiscal stimulus measures in decades last week, which is expected to lead to an increase in inflation in the coming years. The Bank of England will also be the first major central bank to react to Trump winning the US election. Trump's victory may trigger a new trade war, impacting the global economy. This policy could force the Bank of England to reassess its rate cut pace as the additional 30 billion (approximately $38.7 billion) borrowing required for increased public investment and public services repair could prevent the bank from taking more aggressive rate cut measures. Economists warn that the budget could lead to rates being 50 basis points higher than the stimulus plan, making it difficult for the Bank of England to keep up with the loose measures in other regions. Secondly, Trump's election victory may impact global economy through a new round of trade wars, which could also influence the Bank of England's decision. While it is too early to predict the impact of the new trade tensions, the rise in bond yields caused by Trump's victory could put pressure on the economy through tighter financial conditions. Additionally, Trump's tariffs and tax policies could exacerbate inflation, making rate cuts more difficult. Nevertheless, economists expect that all nine members of the Monetary Policy Committee will almost unanimously support a rate cut. According to a survey, economists lean towards an 8:1 majority vote supporting the rate cut this time. If there is a split in the voting results, Catherine Mann is expected to be the sole hawk opposing the rate cut, as she has warned that the Bank of England may start easing policy too early. However, over a third of the surveyed economists expect more people to vote with her to maintain rates unchanged. Although Governor Andrew Bailey has opened the door to accelerating the rate cut pace, after a week of political turmoil, he may adopt a more cautious attitude. The Monetary Policy Committee may reiterate its guidance from September, which is to "gradually remove policy constraints." Sonali Punhani, Chief UK Economist at US Bank, predicts, "We expect the Bank's guidance to remain consistent with September, continuing to emphasize a gradual, incremental approach to policy and maintaining a moderately restrictive stance." Overall, the Bank of England's decision is unlikely to change its rhetoric of cautiously easing policy, especially after the uncertainty sparked by Trump's victory. Traders believe the likelihood of a rate cut in December is less than 25%. By the end of 2025, only three rate cuts have been fully priced in, making the Bank of England's easing cycle lag behind the European Central Bank and the Federal Reserve.