The UK may cut interest rates again this week, with economic weakness being the primary reason.

The Bank of England (BoE) is expected to announce a new round of rate cuts at its monetary policy meeting this Thursday, becoming one of the first major developed economy central banks to continue pursuing monetary easing. The current British economic sluggishness and manageable inflation outlook provide a practical basis for further loosening of monetary policy.

Weak UK Economy Prompts Policy Easing, Divergence from US Path

Unlike the persistent inflation and cautious monetary policy in the United States, the biggest issue the UK currently faces is a lack of economic momentum. In the fourth quarter of last year, the UK economy nearly stagnated, with international uncertainties—particularly external shocks from the Trump administration's large-scale tariff increases—further dampening UK exports and business confidence.

Bank of England policymakers believe these external pressures have not led to an increase in inflation risks; on the contrary, they are more likely to drive prices down. In February, the Bank of England sharply revised its 2025 annual economic growth forecast from 1.5% to 0.75%.

Even though the UK's inflation rate in March remained high at 2.6%, above the central bank's 2% target, policymakers generally believe that prices will steadily decline before 2026.

Strong Rate Cut Expectations, Possibly Maintained at Quarterly Pace

The market is highly focused on the new quarterly economic forecast to be released at this Bank of England meeting. According to LSEG data, traders are widely betting that this meeting will see another 25-basis-point rate cut, lowering the benchmark rate from 4.5% to 4.25%. Market pricing shows a 90% probability of a rate cut, with nearly a 40% chance of rates falling further to 3.5% within the year.

ING analyst James Smith stated, “Amidst continuously depressed business confidence and weak survey data, this rate cut is almost certain. The Bank of England may maintain a quarterly pace of rate cuts, and the rate-cut cycle could continue into next year.”

It is also worth noting that there is some division within the Bank of England's Broker Detectorry Policy Committee (MPC). Some members favor a quicker and more aggressive policy easing. Market analysts believe that although the probability is low, the possibility of a significant 50-basis-point rate cut this week cannot be completely ruled out.

UK-US Interest Rate Spread May Widen Further, Global Attention on Policy Divergence

In contrast, the Federal Reserve appears more cautious. Although US GDP declined in the first quarter of 2025, due to the strong overall economic performance in 2024 and persistent inflation, the Federal Reserve has not yet restarted the rate-cut process.

Federal Reserve Chair Powell recently warned that even with slowing growth, the risk of inflation resurgence remains, making early rate cuts "very difficult."

This trend of policy divergence may further widen the interest rate spread between the US and the UK in the future, bringing profound impacts on global capital flows and the foreign exchange market.

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