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

According to the Zhitong Finance APP, 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 influences of the UK budget and Donald Trump's election victory, making the future trajectory of borrowing costs uncertain. The Monetary Policy Committee's vote is expected to almost unanimously support the rate cut, but the announcement of the budget and the outcome of the US election may increase uncertainty regarding interest rate changes. The Bank of England's decision will be announced at 12:00 PM London time, followed by a press conference hosted by Governor Andrew Bailey. It is understood that the Bank of England's rate decision is influenced by two major domestic and international factors. First, UK Chancellor of the Exchequer Rachel Reeves announced one of the largest fiscal easing policies in decades last week, which is expected to lead to rising inflation rates in the coming years. The Bank of England will also be the first major central bank to respond to Trump's victory in the US election. Trump's win could trigger a new trade war, impacting the global economy. Figure 1 This policy may force the Bank of England to reassess its pace of rate cuts, as increased public investment and the restoration of public services will require an additional £30 billion (approximately $38.7 billion) in borrowing, which could hinder the central bank from taking more aggressive rate-cutting measures. Economists warn that this budget could lead to interest rates being 50 basis points higher than the stimulus plan, making it difficult for the Bank of England to keep pace with easing measures in other regions. Secondly, Trump's election victory could impact the global economy through a new round of trade wars, which may also influence the Bank of England's decision-making. Although it is still too early to incorporate the effects of the new trade tensions into forecasts, the rise in bond yields resulting from Trump's victory could exert pressure on the economy by tightening financial conditions. Additionally, Trump's tariffs and tax cuts could exacerbate inflation, making rate cuts more challenging. Nevertheless, economists expect that the nine members of the Monetary Policy Committee will almost unanimously favor a rate cut. Figure 2 According to a survey, economists tend to support this rate cut by a majority of 8 to 1. If there is a split in the voting results, Catherine Mann is expected to be the only hawkish member opposing the rate cut, having warned that the Bank of England may be starting to ease policy too early. However, more than one-third of the surveyed economists expect that more people will join her in voting to keep interest rates unchanged Although Governor Andrew Bailey has begun to open the door to accelerating interest rate cuts, he may take a more cautious approach after a week of political turmoil. The Monetary Policy Committee may reiterate the guidance from September, which stated "gradual removal of policy restrictions." Figure 3 Bank of America Chief UK Economist Sonali Punhani predicts: "We expect the central bank's guidance to remain consistent with September, continuing to emphasize a gradual, meeting-by-meeting approach and maintaining a moderately restrictive policy." Overall, the Bank of England's decision-making will not change its cautious easing policy wording, especially following the uncertainty triggered by Trump's victory. Traders believe there is less than a 25% chance of a rate cut by the Bank of England in December. By the end of 2025, only three rate cuts are fully priced in, which puts the Bank of England's easing cycle behind that of the European Central Bank and the Federal Reserve. Figure 4