With markets pricing in a near-certain rate cut this week, the monetary policy committee now finds itself the reluctant orchestrator of Britain’s precarious economic balancing act, caught between slowing growth and stubborn core inflation. Despite surging volatility following Trump’s Tariff gambit turning global markets into a pressure cooker, market expectations for a rate cut this week have solidified, with investors betting that policymakers will be forced to step in and loosen financial conditions.

While headline inflation has cooled significantly from the double-digit peaks of 2023, growth has stalled entirely, with the UK economy expected to barely register an expansion in Q4 2024. Furthermore, key indicators such as consumer spending and business investment have shown little sign of life, so just as inflation eased, the risk of recession casts an ever-larger shadow. Policymakers are acutely aware of the uncomfortable reality that maintaining the current rate trajectory could deepen the UK’s economic malaise, choking off investment and dampening consumer demand. The rise in borrowing costs over the past two years has already delivered a significant tightening of financial conditions, prompting questions about whether the risks of further restraint significantly outweigh the benefits.

Additionally, this decision is further complicated by broader global financial conditions, as bond markets worldwide have experienced significant volatility in recent months, with rising yields reflecting concerns over persistently high inflation, elevated debt levels, and shifting fiscal policies. While the UK is not alone in facing these pressures, with similar trends observed in the US and parts of Europe, domestic vulnerabilities, including political instability and fiscal uncertainty, amplify the risks. Moreover, sterling’s performance remains a crucial variable in the broader outlook, as a continued decline could complicate the Bank’s efforts to stabilise prices by raising the cost of imports. This dynamic would likely necessitate a continuation of tightened monetary conditions, undermining any economic gains from this week’s expected cut. 

As it stands, the markets have spoken with a clear belief that the era of relentless tightening is nearing an end. However, whether this optimism is warranted will depend on the Bank of England’s ability to navigate an increasingly treacherous path as global markets continue to influence the domestic economic outlook.