Bank of England could make huge interest rates step this week due to Trump chaos

The Bank of England is preparing to cut interest rates this week amid growing fears that a global trade war risks a fresh economic downturn.

In a dramatic turnaround, the Bank's Monetary Policy Committee (MPC) is expected to cut the base rate from 4.5% to 4.25% on Thursday - a move that would mark the fourth cut since last year's peak of 5.25%, and the second this year alone.

Some City watchers are speculating that some members on the MPC would favour an immediate 0.5% cut to help head off a serious slump.

Trump's escalating trade tariffs - including 25% levies on steel, aluminium and cars, and a 145% effective embargo on Chinese goods - have triggered retaliatory measures from Beijing and sent shockwaves through the global economy.

"The rise in US tariffs and heightened trade policy uncertainty are mainly an adverse demand shock, which will reduce growth and inflation," wrote former rate-setter Michael Saunders, now at Oxford Economics.

Adding to the urgency is a softening in the UK economy. Inflation dropped more than expected to 2.6% in March, wage growth is slowing, and consumer and business confidence are faltering.

In the three months to February, wage growth was 5.9% - still too high for comfort but easing. Labour market signals, however, suggest hiring is cooling.

Megan Greene, an MPC member, noted that a move by China to divert cheap goods from the USA to the UK will lead to lower prices and inflation here.

As a result, the BoE's earlier forecast of inflation peaking at 3.7% this year may now prove too high, with Bloomberg Economics pegging it closer to 3.3%.

Analysts suggest the Bank could even drop its "gradual and careful" mantra. "Carefulness cuts both ways," said Elizabeth Martins at HSBC. "There is a risk of doing too little, as well as a risk of doing too much."

Markets have responded in kind, pricing in up to four more quarter-point cuts this year - a shift from just two predicted after March's meeting. Traders now see rates reaching 3.5% by year-end.

Internally, pressure is building for the Bank to move faster. External MPC member Swati Dhingra is expected to push for a bolder 0.5 percentage point cut, and may be joined by Deputy Governor Dave Ramsden and economist Alan Taylor.

"We could see more dissenters voting for a 50 basis point cut," said George Buckley at Nomura. "That would increase the likelihood of a follow-up 25 point cut in June."

A shift in communications strategy is also on the cards. Meaning suggested the Bank may update its forecasting scenarios, replacing standard inflation paths with ones that reflect different tariff outcomes: a central case, a retaliatory spiral, and a possible retreat by Washington. "Markets and MPC members could then put probability weights on the three scenarios," he said.

Former policymaker Jonathan Haskel urged caution, telling The it was "hard to see the US and China reaching a deal to substantially lower tariffs." But few believe the BoE can afford to wait.

As Governor Andrew Bailey warned at last month's IMF meetings: the UK - an open, trade-dependent economy - faces a "growth shock" as a direct result of Trump's protectionist pivot. The IMF has already slashed its UK growth forecast for 2025 to 1.1%, down from 1.6% in January.

And the risks may be even worse. Edward Allenby at Oxford Economics said: "The near-term UK growth outlook already looked challenging - recent US tariff announcements have added to the headwinds."

Behind it all looms the political chaos across the Atlantic. Fed Chair Jerome Powell - who recently quipped "life moves pretty fast" in a nod to Ferris Bueller's Day Off - is navigating his own minefield, resisting pressure from Trump to slash US rates. The day after Powell's pop culture reference, Trump publicly mused about firing him.

Back in Britain, the MPC's challenge is to maintain credibility while adapting to rapidly shifting ground. The committee's dovish tilt suggests it may prioritise growth over inflation. As Sandra Horsfield of Investec put it: "Virtually everything has pointed in the direction of lower UK inflation pressure."