ACM Update 11-08-25
As expected, the Bank of England moved to cut interest rates last Thursday, now at their lowest level in over two years. But the decision itself wasn’t straightforward, with an unprecedented second vote required to reach a majority decision. Have we now seen the final UK rate cut of 2025?
Over in the US, stagflation fears are rising again as the impact of tariffs starts to bubble to the surface. Meanwhile Donald Trump is lining up his own chosen replacements to join the Federal Reserve’s rate-setting committee.
After holds in policy from the ECB and Federal Reserve in recent weeks, Thursday saw the Bank of England make their own call. The interest rate announcement on Threadneedle Street delivered a widely expected outcome, but it was the nature of the decision which caught markets by surprise and led to Sterling recovering ground.
As mentioned, the nine-member rate setting panel took two attempts to reach their verdict, after a three-way split emerged in their desired direction. Four members wanted to leave rates unchanged, four requested a cut of 0.25%, whilst a solitary policymaker wanted a larger 0.50% cut. Alan Taylor was the man wanting the larger cut, but in a second round of voting he moved to create a 5-4 majority for the 0.25% cut. About as exciting as it gets for the Monetary Policy Committee!
This gave financial markets (and mortgage holders) their expected outcome but was a far cry from the 8-1 vote for a cut that was projected. The difference led to rapidly revised expectations for future rate cuts in 2025, with a realistic possibility that we may not see any more cuts throughout the remainder of the year. This saw the Pound recover by a cent (0.85%) within the space of 24 hours after the announcement.
Despite the tight decision, Governor Bailey reiterated his comments that the path for interest rates remained downwards but admitted where next “is a bit more uncertain frankly”. He was one of those who voted for a cut on Thursday.
The Bank also revised their inflation projections. These now expect inflation to peak at 4% in September, revised up from a 3.7% peak previously. Much of this has been attributed to adverse weather conditions globally, influencing the price of UK favourites such as coffee and cocoa. Bailey & Co don’t expect higher inflation to persist, but intend to watch carefully.
Bailey also continues to highlight that domestic tax rises in April are likely to have a temporary impact on inflation. Concerns about a “softening” UK jobs market were also mentioned, in one of many slight jabs at Chancellor Rachel Reeves, after the two continued their public spat from the previous week.
Speaking of the Chancellor, she had further opinions from the National Institute of Economic and Social Research last week. The NIESR declared that the Government is set to miss their own self-imposed tax rules by £41.2bn, requiring an increase in tax to make up the shortfall. Reeves disagreed with the independent body’s assessment, whilst PM Starmer didn’t directly answer when asked about a tax rise in the October Budget. Watch this space…
Overall, the change in interest rate stance was buoyant for GBP. The future path of interest rates and revised inflation expectations, now seem to suggest interest rates will be at their current levels for a few months yet. This helped GBP recover to its highest against the US Dollar for a fortnight, whilst against the Euro rates moved back to their best in just over a week.
The recovery in GBP-USD can be seen in the chart below:
On the Dollar front, concerns are mounting that the US economy is slowly moving towards “stagflation” territory. Not a term that has made an economic appearance for a few years now but essentially refers to a combination of stagnant economic growth and stubborn inflation. This presents a challenging scenario for central banks, as individually the two issues require different things from monetary policy.
The Dollar has been firmly on the back foot in 2025, down 8% against other currencies since Trump 2.0 began. Bets are rising for a September interest rate cut from the Federal Reserve to help the sluggish economy out, especially after the weak jobs data delivered ten days ago. As we all know from Trump though, the data was “RIGGED”!
The concerns are how an interest rate cut will impact on inflation though, hence the caution from the Federal Reserve’s policymakers. With US inflation already nudging upwards, there are major concerns that Trump’s tariffs (if determined legal by the courts) will just end up being passed on to domestic consumers, exacerbating the problem. This could well reignite US inflation.
Meanwhile, Trump is busy trying to orchestrate his own new-look Federal Reserve rate-setting committee. With one member, Adriana Kugler, stepping down before the end of her term, the President is pushing Stephen Miran to fill the vacant Fed seat. Miran is currently heading the Council of Economic Advisers and was a key advocate for the current tariff approach.
Current Fed policymaker Christopher Waller is now emerging as a front-runner for the head of the central bank when Jerome Powell’s term ends. That is regardless of whether it ends as intended in May 2026, or if Trump decides he has the power to end it before. Supposedly the Trump team like Waller’s stance of making policy decisions based on forecasts, rather than current data. For reference, Waller was one of two who dissented and voted for a rate cut in the most recent meeting.
On the tariff front, the economic slowdown was also demonstrated by a -4.8% slowdown in US factory orders in June. Trump for now sees this as a bump in the road.
A quieter week in the Eurozone with summer holidays there in full swing. The raft of PMI figures from the bloc for July came in broadly better than expected. The French Services PMI figure was the outlier, displaying a reading both under expectation and sub-50, indicating contraction in the sector. Unsurprisingly given the summer break and general positivity about their economy at present, the equivalent Spanish services sector figure was the most buoyant.
EU retail sales recorded a bounce back of 0.3% in June. Although this was lower than expected, it did counteract the negative figure for May which was revised to -0.3% from the previously published -0.7%.
The ECB’s Economic Bulletin was also released, reiterating a lot of the comments covered by the bank following their recent policy meeting. The data-dependent stance remains, with the bank committed to maintaining their current 2.0% inflation reading, as well as boosting growth.
Overall, a slight gain for the Euro this week against the Dollar but losing ground versus the Pound after the Bank of England announcement. The chart for the latter can be seen below:
The week ahead:
Monday – Japan Bank Holiday
Tuesday – Reserve Bank of Australia rate announcement (05:30), UK Unemployment & Average Earnings (07:00), EU ZEW Economic Sentiment (10:00), US CPI inflation (13:30)
Wednesday – Fed Barkin (13:00) Fed Goolsbee (18:00) & Fed Bostic (18:30) speeches
Thursday – UK GDP (07:00), EU Flash GDP (10:00), US PPI inflation (13:30), Fed Barkin speech (19:00)
Friday – European Bank Holiday, US Retail Sales (13:30), UoM Consumer Sentiment (15:00)
So, the Pound seems to be on a slight recovery mission after last week’s Bank of England announcement. An assumed guaranteed interest rate cut turned into a knife-edge decision, which has called into question the prospect of further interest rate cuts throughout the rest of the year. Given the slightly quieter trading conditions we may see a slight uptick for GBP this week.
That is, provided UK data releases this week are favourable. Tuesday gives the latest on the UK unemployment rate, expected to remain at its four-year high of 4.7%. Average earnings (wage growth) data is released in tandem and expected to show a drop down to 4.7% also. If correct, the gap between wage inflation and earnings continues to narrow.
The latest on UK GDP comes on Thursday, expected to show 0.2% for June and 0.1% for Q2 as a whole. Rachel Reeves will be hoping for a bare minimum of a positive figure on both. As Andrew Bailey said last week though in one of his many Chancellor-aimed jabs, a projected growth of just over 1% for the year “isn’t usually something to be proud of”.
US data features the latest on inflation, with CPI forecast to nudge up further to 2.8% and a slight uplift expected for PPI too. One would hope that anything worse than forecast doesn’t see Trump firing another statistician… Retail sales from the US and consumer sentiment data from the University of Michigan surveys close out the week, with a scattering of Fed policymaker speeches in between.
With a range of European countries with bank holidays on Friday, we can expect a quiet end to the week there.
Last week demonstrated just how quickly things can turn, with a very-much priced in rate announcement seeing GBP swing back the other way after a more positive outlook was delivered. Currency markets are as unpredictable as ever, so to remove risk from your exchanges, reach out to the Aston team for more information.
Have a great week.
