Bank of England in "impossible position" over interest rate cuts decision

THE Bank of England (BoE) is in an “impossible position” on whether to cut interest rates this week with experts undecided whether it will do so.

The UK economy is on its knees and it contracted by 0.3% in April, the first month of the second quarter. 

Unemployment is rising with vacancies and payrolled jobs dropping sharply - while Chancellor Rachel Reeves announced a massive splurge in the Government's Spending Review.

Inflation figures will be released in CPI data on Wednesday - an uptick or downturn will heavily influence the BoE's decision.

Against this backdrop, the BoE needs to decide on Thursday whether to cut its interest rates from 4.25%.

Faisal Sheikh, Managing Director at Monmouth Capital, said he expected a “small cut”.

He said: “The downsides to a small cut are limited, especially with recent poor economic data.”

Though Stephen Perkins, Managing Director at Yellow Brick Mortgages, believes the BoE will instead hold the rate.

He added: “Whilst all indicators point to a base rate reduction being beneficial and required, the Bank of England rarely take any decisive action based upon a single month's data. 

"The chances therefore are a hold in June and cautiously await more data before any potential rate cut. Afterall they will not want to pre-emptively fuel inflation further.”

Harry Mills, Director at Oku Markets, was more unsure.

On the one hand the BoE could implement a “cautious cut” - or it could hold to “wait-and-see” the consequences.

He said: "April’s GDP contraction is a clear signal that the UK economy is under real pressure. The combination of rising unemployment, falling vacancies, and weaker payroll data paints a worrying picture - May saw 100K jobs lost, adding to more than 250K since the Autumn Budget. 

"The Chancellor’s NIC hikes have only added to the pressure already piling on British businesses. The Bank of England should be preparing to cut rates, but it’s unlikely to act before seeing the inflation data on Wednesday. 

“Services inflation remains sticky, and the Bank will want to avoid a premature move. That said, the longer it waits, the more it risks deepening the downturn. A cautious cut now could help restore confidence without fuelling inflation, but they'll probably continue to wait-and-see.”

Rob Peters, Principal at Simple Fast Mortgage, said the BoE would wait to see what inflation data was on Wednesday before making a decision the day after, but he thought a “cautious pause” was most likely.

He added: "The economy shrinking by 0.3% in April is a red flag, but the Bank will almost certainly wait for Wednesday’s CPI data before making its move. If inflation finally dips to or below 2%, it opens the door for a rate cut, possibly this week, but more likely in August. 

“There’s a strong case for easing soon: unemployment is up, vacancies are down, and payrolled jobs are falling. But the MPC has been very clear that it's all about inflation. One misstep and confidence could unravel. The pressure’s mounting, but a cautious pause still seems the most likely outcome.”

Kundan Bhaduri, Entrepreneur at The Kushman Group, said the “siren call for a rate cut” is “deafening” - but fears a rate cut could lead to higher inflation.

He said: "The economic contraction was an entirely predictable consequence of a government whose NI hikes actively discourage work and whose broader policies treat growth as an afterthought. It places the Bank of England in an impossible bind. With unemployment ticking up and job vacancies vanishing, the siren call for a rate cut this Thursday will be deafening. 

"Yet, with Wednesday’s CPI data pending, an ill-timed move could easily reignite inflation, proving the Bank has succumbed to political pressure rather than economic prudence. The uncomfortable truth is that monetary policy cannot cure structural economic malaise born of political folly. 

“Real recovery demands a government courageous enough to implement radical supply-side reforms: a bonfire of the red tape strangling enterprise, a tax system that rewards investment and risk (especially in desperately needed housing), and an end to the charade that Britain can tax its way back to prosperity. That brand of fiscal cannabis we must not smoke.”

David Belle, Founder and Trader at Fink Money, said the BoE is in a very difficult position.

He added: "Again, the Bank of England is between a rock and a hard place. Inflation is higher but growth collapsing. That is stagflation. With war also being a possible outcome leading to higher oil, it could mean that energy prices tick higher, worsening inflation and the growth outlook. 

“We are in a very isolated issue at the moment due to our borrowing vs growth being at such a poor skew relative to our peers. And the BoE doesn’t actually care that much due to the fact their asset purchase facility is indemnified by the Treasury meaning they can sell bonds at any price (at a loss) and the taxpayer pays. A truly awful dynamic.”