Tariff clouds shroud growth prospects, Bank of England may be forced to accelerate interest rate cuts.

The Bank of England is expected to cut interest rates by 25 basis points this week and pave the way for the first consecutive interest rate cuts since 2009 to counter the global trade war initiated by US President Trump. A survey of 32 economists showed that all economists expect the Bank of England to cut interest rates by 25 basis points at Thursday's policy meeting. At the same time, 29 of the 32 economists surveyed believe that the Bank of England's Monetary Policy Committee will vote unanimously for a 25 basis point cut. Most economists believe that in evaluating the tariff policy of the Trump administration - and its future policy uncertainty - the Bank of England will adopt a dovish stance. At the same time, most economists expect the Bank of England to lower its economic growth forecast for next year. Some believe that the Bank of England may take a more dovish turn. Barclays UK Chief Economist Jack Meaning believes that the Bank of England may cut interest rates this week and then follow up with another 25 basis point cut in June. If as expected by Jack Meaning, this will be the first consecutive interest rate cut by the Bank of England since early 2009 (excluding two emergency cuts in March 2020 at the start of the pandemic). It is worth noting that the market currently expects the Bank of England to make four 25 basis point rate cuts for the remainder of this year, totaling 100 basis points, reducing the base rate from 4.5% to 3.5%. After the policy meeting on March 20, the market expects the Bank of England to make two 25 basis point rate cuts for the remainder of this year, reducing the base rate to 4%. Since the Bank of England's last policy meeting in March, the world has undergone dramatic changes. Trump announced widespread imposition of so-called "reciprocal tariffs" in early April, sparking concerns about a slowdown in global economic growth. Domestically in the UK, the situation has also changed. Wage growth in the UK has consistently been below the Bank of England's forecast released in February. The strengthening of the pound against the dollar, due to investors shunning US assets, has lowered import costs and led to a decline in energy prices in the UK. Additionally, according to Bank of England Monetary Policy Committee member Megan Greene, the shift of Chinese goods to the UK market "will generally have a deflationary effect". The Bank of England's February forecast stated that inflation this year will peak at 3.7%. Bloomberg Economics currently forecasts this peak to be at 3.3%. Although the Bank of England's economic growth forecast in February was stronger than expected, Bank of England Governor Bailey warned last month that the global trade war will have a particularly severe impact on open economies like the UK. Former Bank of England official and current senior advisor at the Oxford Economics Research Institute, Michael Saunders, said, "The rising levels of US tariffs and trade policy uncertainty exacerbate negative demand shocks, which will curb inflation." He added that this makes the Bank of England Monetary Policy Committee's decision easier than that of the Fed, as the Fed is faced with negative supply shocks that suppress growth and increase inflation, requiring a balancing act between the two. Michael Saunders believes that the Bank of England will adopt a "least regret" strategy, "implementing planned easing measures ahead of schedule." Jack Meaning also believes that it is highly likely that the Bank of England will accelerate its pace of interest rate cuts. He pointed out, "I think they will almost certainly indicate that the risk balance has changed, so they are likely to adjust the guidance to pave the way for consecutive rate cuts. This will open the door to a rate cut in June, but without making a definitive statement to maintain flexibility." "Incremental and cautious" To confirm the new dovish stance, the Bank of England may change its guidance of "incremental and cautious" rate cuts. Both Michael Saunders and Jack Meaning indicate that the term "incremental" may be removed. Vote dissension could also serve as a signaling mechanism. The 9 members of the Bank of England Monetary Policy Committee are expected to unanimously pass the rate cut resolution on Thursday. Chief UK economist at Bloomberg Economics Dan Hanson and others believe that committee member Swati Dingra may vote to support a 50 basis point rate cut. Nomura Securities economist George Buckley believes that Deputy Governor Dave Ramsden and another committee member Alan Taylor may join Swati Dingra, reinforcing the shift towards a dovish stance at the Bank of England. He said, "We may see more dissenting voters supporting a 50 basis point rate cut, increasing the likelihood of a further 25 basis point rate cut by the Bank of England in June." Furthermore, with the macroeconomic backdrop becoming increasingly uncertain due to the trade war initiated by Trump, the challenges facing the Bank of England are becoming more complex. To address this uncertainty and communicate with the market, the Bank of England may use more scenario analysis in its latest forecasts. Jack Meaning suggested that the Bank of England may replace the current three "scenarios" reflecting different inflation paths with three tariff scenarios, providing a more comprehensive forecast. He said that in addition to the core scenario, there should be a scenario involving trade retaliations and a scenario with concessions from the White House, "so that the market and Monetary Policy Committee members can assign probabilities to these three scenarios". The impact of Trump's tariff policy will be most evident in the Bank of England's expectations for economic growth. Dan Hanson expects that given the stronger than expected performance at the beginning of the year, the Bank of England will slightly raise its growth forecast for 2025 from 0.7% in February to 0.8%, but will lower the growth forecast for 2026 from 1.5% to 1% - by then, the impact of tariffs will be most evident. He added that forecasts for inflation and market borrowing costs decreasing mean that the Bank of England should cut rates to at least 3.75% by the end of the year.