BoE Preview: stagflationary tendencies suggest a careful rate cut

In the UK, a drop in consumer confidence and business sentiment in April suggest that trade tariffs and higher employment costs have undermined economic activity. PMIs pointed to stagflationary tendencies , with business activity falling into contraction in the services sector, while price components edging higher. The labour market in the UK was weakening only slowly, with private sector pay still rising strongly . Meanwhile, March inflation slowed more than expected, but this was much “ the calm before the storm” due to April’s increases in utility prices alongside higher employment taxes, which are set to drive inflation close to 3% this year. At the same time, US tariffs will be disinflationary and weaker economic growth should help lowering inflation back to the 2% target. Overall , we expect the BoE to stick to its “ gradual and careful ” approach in cutting borrowing costs , namely at every second MPC rate meeting this year. We expect t he MPC will cut interest rates by 25bp to 4.25% on May 8 , followed by two more rate cuts in August and November, resulting in the Bank Rate at 3.75% at the end of this year.