Bank of England set to cut rates amid UK’s deepest economic contraction in years

The Bank of England is expected to lower its key interest rate to 4.0 percent as the UK economy faces a second consecutive month of contraction, driven by weakening manufacturing, construction activity, and rising inflation pressures linked to US tariffs and domestic fiscal challenges.

The Bank of England is widely anticipated to cut its key interest rate by a quarter point to 4.0 percent amid mounting concerns over the weakening UK economy and inflationary pressures. Policymakers are expected to weigh the risks posed by a faltering labour market, rising food prices, and uncertainty tied to US tariffs introduced under President Donald Trump. Victoria Scholar, head of investment at Interactive Investor, highlighted clear signs of economic deterioration, particularly in employment, which underpin the case for monetary easing. However, some members of the Monetary Policy Committee are likely to advocate for either a more significant rate cut or no change, reflecting divisions within the bank as it navigates this precarious economic landscape.

The UK economy has recently contracted for a second consecutive month as of May 2025, with official figures revealing a 0.1 percent decline following a 0.3 percent drop in April. This marks a worrying trend, as sustained contractions threaten to derail anticipated modest growth for the second quarter. The downturn stems from weaknesses in key sectors such as industrial output and construction, even as the services sector records slight, albeit slowing, growth. The economic malaise is compounded by the Labour government’s increased business taxation introduced in April, coinciding with the imposition of US baseline tariffs on many UK imports. Although a partial trade agreement with the US has eased some of the levies on certain UK goods, such as vehicles, the broader trade friction continues to cast a shadow over economic recovery prospects.

Further complicating the outlook is the manufacturing sector’s persistent contraction. Although July 2025 saw some signs of a slowing downturn with PMI data improving slightly, manufacturing activity remained subdued due to increased employer costs, including social security contributions and minimum wage hikes, alongside ongoing impacts from US trade tariffs. The sector, representing about 10 percent of the UK economy, continues to face challenges with jobs being cut and export orders dwindling, limiting its contribution to overall growth. Simultaneously, the services sector—traditionally the stronger arm of the UK economy—is also showing strains, with its steepest fall in new orders since late 2022 and an increase in job reductions. This contraction has led to muted business confidence and signals broader demand weakness, which is critical given the sector’s dominance in the economy.

The construction industry stands out as another weak point, with activity plunging to its lowest level in over five years in July, according to the S&P Global PMI. Residential building and civil engineering have been particularly hard hit, raising doubts about the government’s ambitious housing delivery targets. Despite government initiatives aimed at stimulating infrastructure investment through relaxed borrowing rules and planning reforms, construction firms report delays, fewer tender opportunities, and a worrying lack of client commitment. This downturn amid persistent job losses adds to the economic headwinds facing the UK and complicates the government’s efforts to stimulate growth.

Amid these challenges, inflation remains a pressing concern. The Bank of England’s primary objective is to maintain inflation at around 2.0 percent; however, recent data show the Consumer Prices Index rising unexpectedly to 3.6 percent in June, driven by sustained high motor fuel and food prices. This inflationary pressure adds complexity to the monetary policy decision, as cuts in interest rates to support growth carry the risk of further stoking price rises.

Global factors also play a significant role. The Bank of England has expressed concerns about the unpredictability of US tariffs and geopolitical risks, particularly conflicts in the Middle East, as potential threats to UK financial stability. The US Federal Reserve recently held interest rates steady despite political pressures to cut, reflecting ongoing uncertainty around the impact of tariffs on global trade. Meanwhile, the European Central Bank is expected to maintain rates unchanged with inflation close to its target, although this stance could shift if trade tensions intensify.

The BoE’s anticipated modest rate cut would mark the fifth reduction since the trimming cycle began in August 2024, illustrating a cautious, gradual approach to tackling economic weakness. Chancellor Rachel Reeves faces a delicate balancing act as the Labour government contends with this sluggish economic environment alongside fiscal pressures, including a potential budget shortfall and calls from business leaders to avoid further tax hikes. The broader economic outlook remains clouded by subdued growth prospects, rising unemployment, and fragile business and consumer confidence, making the coming months critical for both policymakers and market observers.

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Source: Noah Wire Services

Noah Fact Check Pro

The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.

Freshness check

Score:
8

Notes:
The narrative is current, published on August 6, 2025. Similar reports have appeared in reputable outlets like Reuters and the Financial Times on the same date, indicating timely coverage. The Digital Journal article references these sources, suggesting it is a republished press release. Press releases typically warrant a high freshness score due to their timely nature. No significant discrepancies in figures, dates, or quotes were found. No earlier versions with different details were identified. The article includes updated data but recycles older material, which may justify a higher freshness score but should still be flagged.

Quotes check

Score:
7

Notes:
The article includes a quote from Victoria Scholar, head of investment at Interactive Investor, highlighting signs of economic deterioration. This quote appears in the Reuters article published on August 6, 2025. The wording matches exactly, indicating potential reuse of content. No earlier usage of this quote was found, suggesting it may be original or exclusive content.

Source reliability

Score:
6

Notes:
The narrative originates from Digital Journal, which is not widely recognised as a reputable organisation. The article references reputable sources like Reuters and the Financial Times, but the reliance on a less established outlet raises concerns about the overall reliability. The presence of a direct quote from a reputable source adds some credibility.

Plausability check

Score:
8

Notes:
The claims about the Bank of England’s anticipated interest rate cut and economic concerns align with reports from reputable outlets like Reuters and the Financial Times, published on the same date. The narrative includes specific details such as the expected rate cut to 4.0% and mentions of US tariffs and inflationary pressures, which are consistent with other reports. The language and tone are appropriate for the topic and region. No excessive or off-topic details are present.

Overall assessment

Verdict (FAIL, OPEN, PASS): OPEN

Confidence (LOW, MEDIUM, HIGH): MEDIUM

Summary:
The narrative is timely and aligns with reports from reputable sources, but its origin from a less established outlet raises concerns about reliability. The direct quote from a reputable source adds some credibility. The content is plausible and consistent with other reports. Further verification of the source’s credibility is recommended.