Markets Reprice Rate Cuts After US Tariff Shock

Financial markets now anticipate sharper interest rate cuts by the Bank of England, following the US’s new tariff measures. The UK, despite facing a lower 10% tariff compared to the EU’s 20%, has seen a more dramatic market reaction.

Tariffs Pose Sector-Specific Risks, But Limited GDP Impact

While exports to the US represent only 2.2% of the UK’s GDP, critical sectors such as automotive and pharmaceuticals remain exposed. Analysts estimate the overall impact on GDP could be around 0.2%, unless a global slowdown amplifies the effect.

Inflation Pressures Likely to Remain Contained

The UK has yet to retaliate against US tariffs, reducing inflationary risks. In fact, cooling growth may introduce deflationary pressures. The Bank of England is still expected to cut rates quarterly, targeting a 3.25% base rate by 2026.

Fiscal Policy Under More Pressure Ahead of Autumn

New trade barriers tighten the UK’s already limited fiscal space. With government spending likely to remain steady, further tax hikes seem inevitable to meet fiscal rules and stabilize the budget.

Strategic Trade Choices: EU Ties Over US Deals?

With US-UK trade negotiations in limbo, the UK may lean towards deeper EU alignment. Closer European integration could offer stronger economic benefits and more reliable growth prospects.