Markets have raised the prospect that the Bank of England will cut the base rate by up to four times this year, as fears of a global trade war rise.
US President Donald Trump has said he would impose tariffs of 25% on Mexico, 25% on Canada and 10% on China over the weekend. Although there is uncertainty over when these sanctions will begin.
The newly elected President also signalled that the UK and the European Union could also be in line for tariffs due to an unequal balance of trade.
This sent stock markets reeling around the world, worried that the move will raise consumer goods prices and slow international trade.
Before trading opened this morning, Deutsche Bank strategist Jim Reid said: “Standby for a manic Monday as the world tries to come to terms with the “shock” tariff announcements from Mr Trump’s administration on Saturday night.
“I say shock but all Trump did was follow through on exactly what he’s been saying he’s going to do since November.
“The market has refused to take that threat seriously though, completely under-pricing the risks. So, this leaves the weekend news as a severe shock.”
In London, the FTSE 100 opened 1.25% down and was 1.05% lower, or 90.85 points, at 8,583.11 in late afternoon trading.
This raised the odds of the Bank of England cutting interest rates several times amid fears of global trade conflict.
Money markets are now pricing in an 80 basis points cut to Bank rate by the end of this year.
That means three 0.25% cuts are fully priced in with the possibility of a fourth.
This is up from 75 basis points of cuts expected last Friday.
An anaemic UK economy has most traders firmly betting that Bank of England’s rate-setters on the Monetary Policy Committee will have little choice but to cut the base rate from 4.75% on Thursday.
Both Goldman Sachs and Deutsche Bank forecast the committee will vote 8-to-1 to bring down the rate by 0.25% to 4.50%.
The current set of UK economic data is gloomy. The economy edged 0.1% higher in November driven by pub and restaurant trade as well as the construction industry, after shrinking in October and September.
Inflation stands at 2.5%, above the central bank’s 2% target.
Last month, Lloyds Banking Group chief executive Charlie Nunn said he anticipated three base rate cuts this year as he characterised the UK as a “resilient.”
Goldman Sachs has long predicted the Bank of England will cut Bank rate four times in a bid to keep the UK economy moving.
The consensus view at the start of the year was that the UK central bank would cut the base rate twice this year.
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