The ongoing unpredictability of the US administration under President Donald Trump’s second presidency has created a challenging environment for policymakers, forecasters, and businesses. The constant stream of policy shifts and reversals, such as the recent decision to reduce tariffs on Chinese goods for a temporary period of 90 days, has made it difficult for companies to plan and strategize effectively.
Despite a temporary boost in US stock prices following the de-escalation of the trade war, economists and market analysts remain cautious. Capital Economics, for example, adjusted its forecast for the S&P 500 reaching 7,000 by the end of the year, citing a less favorable economic outlook. The erratic nature of US policymaking has left investors more wary and hesitant, with lingering uncertainty affecting market dynamics.
The recent trade developments, including the UK-US trade deal and the reduction in tariffs, have not eliminated the underlying challenges. Tariffs remain in place, impacting the cost of goods and potentially hindering economic growth. The UK-US trade deal, while beneficial in some aspects, still leaves tariffs higher than pre-April levels, with minimal overall economic impact.
The Bank of England (BoE) faces a complex inflation scenario influenced by external factors like tariffs and domestic economic conditions. The recent decision to reduce interest rates by 25 basis points reflects concerns about the impact of tariffs on the economy. However, the BoE’s focus on domestic factors and gradual decision-making process have proven to be prudent, especially in light of the recent tariff reductions by the US.
Businesses are grappling with challenges like weak growth, tariffs, and rising labor costs. The latest wage growth figures indicate a slight decline in wage inflation, but the level of wage increases remains high. This poses a challenge for the BoE in achieving its inflation target of 2 percent, especially as price growth is expected to rise further due to hikes in utility bills.
The consensus among market analysts is that the BoE will implement two more rate cuts this year, likely in August and November, with holds in June and September. This trajectory could see interest rates reaching 3.75 percent by the end of the year, as the BoE navigates the complex economic landscape shaped by global trade dynamics and domestic inflation pressures.