Market experts say slowing economy clears path for monetary policy easing
Expectations for an August interest rate cut by the Bank of England have intensified after latest data showed the UK economy shrank for a second month in a row.
Figures released by the Office for National Statistics (ONS) revealed GDP fell by 0.1% in May, showing ongoing weakness that has prompted several economists to forecast that the central bank’s Monetary Policy Committee (MPC) will move to lower interest rates at its next meeting on August 7.
Sanjay Raja, chief economist at Deutsche Bank, said a cut next month was now “almost certain” and signalled “more to come” before year-end.
The bank last cut rates in May, trimming them to 4.25%. While inflation has eased in recent months, the MPC held rates steady at its June meeting, citing the need to “squeeze out persistent inflationary pressures.” But signs of slowing economic momentum are shifting the outlook.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the weaker-than-expected May GDP result “will keep the market pricing a high probability of an MPC rate cut in August.” He added that inflation and labour market figures due next week were “the only barriers” to a move.
The June decision revealed a divided MPC, with three of nine members — Swati Dhingra, Alan Taylor and Deputy Governor Dave Ramsden — voting for a 25 basis point cut. Dhingra and Taylor had previously pushed for a deeper 50 basis point reduction, highlighting growing support for looser policy, a City AM report noted.
The bank has maintained a cautious approach in recent months amid global uncertainty, including tensions in the Middle East and trade policy risks tied to the upcoming US election.
“Falling interest rates look set to support activity but a looser market is likely to constrain activity,” said Ellie Henderson, economist at Investec.
She expects rates to gradually decline, eventually reaching 3% in the second half of 2026.
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