After the Bank of England Monetary Policy Committee voted to cut interest rates yesterday, investment managers discuss the impact and the possibility of a further rate cut.
The Bank of
England“s Monetary Policy Committee (MPC) voted five to
four in favour of cutting interest rates from 4.25 to 4 per
cent yesterday, in line with market expectations
The dissenting members preferred to leave rates unchanged at 4.25
per cent.
“We’ve cut interest rates today, but it was a finely balanced
decision. Interest rates are still on a downward path, but any
future rate cuts will need to be made gradually and carefully,”
Andrew Bailey, the head of the Bank of England, said.
UK chancellor of the exchequer Rachel Reeves said the government
is putting more money in people’s pockets, but the Conservatives
said rates should be falling faster.
Here are some reactions from investment managers to the cut.
Nicholas Hyett, investment manager at Wealth
Club
“The Bank’s Monetary Policy Committee has launched a pre-emptive
strike on any economic downturn later in the year. It remains
unsaid in these minutes, but the increasing likelihood of tax
hikes and/or spending cuts at the Autumn Budget has also probably
played a part in this “finely balanced” decision. Both consumers
and companies could see their pockets squeezed by the taxman, and
that would have knock-on effects for economic growth.
“While inflation is expected to rise a bit in September, the bank
believes it will fall back towards the 2 per cent target from
there. That’s opened up the space for today’s pre-emptive action.
The market seems to be suggesting there could be another cut
later this year – and with one member of the MPC already arguing
in favour of a move to 3.75 per cent you can see why. It feels
like we’re entering a wait-and-see phase. Does this rate cut give
the economy a little bit of extra umph it badly needs, or will
the Bank need to act again come the Budget? Time will tell.”
Joaquin Thul, economist at EFG Asset
Management
“The minutes from the meeting reflected that the deceleration in
core services price pressures and softening of wage growth has
continued, although to different degrees. Activity levels have
been weak, consistent with a loosening in the labour market and
offset the strong growth in the first quarter of 2025. The latter
was attributed to domestic front-loading ahead of expected rises
in taxes and international tariffs. The MPC increased their
expectations for CPI inflation in the coming months; expecting
prices to peak at 4 per cent in September, rather than 3.75 per
cent, as reflected in the previous Monetary Policy Report in May.
Therefore, they decided to maintain the references in the minutes
to the need for a gradual and careful approach to the further
withdrawal of monetary policy going forward.
“Overall, the decision to cut rates by 25 bps was widely
anticipated by markets. However, the narrow vote among MPC
members was a surprise and reflects the challenges faced by
policymakers at the BoE given differences in the data. Therefore,
it would not be surprising to see a more hawkish approach in the
coming months, as MPC members will need to see a significant
progress in the data before cutting rates again. As such, given
that inflation is expected to increase to double the target level
in September, it would not be surprising to see a pause in the
loosening of monetary policy at the next meeting in September.”
Ed Monk, Fidelity International
“The doves at the Bank of England have won out for now.
Ahead of the decision today, the gilt market was predicting rates
to fall below 3.5 per cent within 12 months – suggesting
three more quarter-point reductions over the next year following
the cut today. However, the closeness of the
five-to-four vote split on the MPC – with one member
initially favouring a larger half-point cut – confirms the
high degree of uncertainty around those expectations.
“Inflation has surprised to the upside recently. The Bank’s own
forecast from May suggested that inflation would hit 3.7 per cent
by September before falling away. That has now been revised
higher to 4 per cent. The consumer price index (CPI) rose by 3.6
per cent annually in July, meaning we’re approaching that
predicted peak. The reading in August will be watched very
closely. The weakening jobs market could alter the thinking
among MPC members. Vacancies have been falling and employers are
reporting their reluctance to replace workers who have left. That
has the potential to reduce demand in the economy and pull
inflation down further and faster. Pay growth is running at 5 per
cent, however, and several MPC members are clearly concerned that
this will feed through to higher inflation.
“The cut in rates further diminishes the appeal of cash savings
– especially with inflation remaining well above the Bank’s
2 per cent target. Our own customer data show that cash and
cash-like investments have soared in popularity over the past few
years in line with the sharp rise in interest rates that followed
the peak in inflation in 2022. Cash and money market funds were
among the best-sellers for Fidelity Personal Investing customers
in the first half of the year, although their popularity began to
wane in July. There is also evidence, however, that some are
looking further afield for their income as rates on cash fall.
Funds targeting regular dividends also returned to the
best-sellers’ list last month.”
Oliver Jones, head of allocation at
Rathbones
“We expect the Bank of England to keep cutting interest rates
once a quarter into next year. Despite the recent concerns about
the quality of the data, it’s increasingly clear that the UK
labour market is weakening with jobs vacancies generally below
pre-pandemic levels and numbers of employees clearly falling.
“For these reasons we expect the Bank to keep loosening rates,
despite inflation being well above 3 per cent. The biggest risk
to this would be any evidence that inflation will not fall back
as fast as expected next year. Changes in government policy such
as higher National Insurance and wage increases have kept
services inflation in the 4.5 to 5.5 per cent range for months
but further increases, and food inflation running at 5 per cent
are also headaches for the MPC.”
Charlotte Kennedy at Rathbones
“Financial plans should always have a degree of flexibility to
accommodate changes in interest rates. The recent cuts will ease
some of the cost pressures facing those nearing the end of their
fixed-rate mortgage deals – many of whom secured ultra-low
rates during the historic lows of recent years. This shift could
also unlock a wave of would-be buyers who have been waiting in
the wings, hoping for affordability to improve so they can take
that first step onto the property ladder.
“The reverse is true for savings rates which are increasingly
languishing behind inflation, eroding savings in real terms. For
those with the financial means and a long enough time horizon
– typically five years or more – investing offers the
potential for inflation-beating returns and a more robust route
to growing wealth over the long term.”
James Tothill, investment specialist at
Wesleyan
“While it was generally expected that interest rates would
fall this year, what’s becoming clear is that they’re staying
higher, for longer, than markets previously forecast – mainly due
to sticky inflation. The challenge for savers is uncertainty.
This is another opportunity for advisors, and advice firms, to
highlight the value of maintaining a long-term view and having a
plan that is prepared to keep savers on track for good outcomes,
whatever happens.”
Michael Metcalfe, head of macro strategy at State Street
Markets
“With four dissenters, the future descent of UK interest rates
remains in doubt. With online prices still pointing to an
acceleration of annual inflation through August, the MPC’s
doubters look unlikely to be assuaged any time soon unless fiscal
policy gets notably more contractionary.”
George Brown, senior economist at Schroders
“Today’s rate cut is no surprise, but the path forward is
anything but clear. Jobs, growth and inflation figures all call
for different policy prescriptions, as reflected in the
unprecedented two rounds of voting needed to reach a majority.
Given the uncertainty presented by the conflicting data, the
committee is right to stick to its “gradual and careful” mantra.
Nervousness about the labour market might prompt another cut in
November. But this will be difficult to justify unless
disinflation is clearly underway. As such, we think there is a
decent chance rates will not fall below the current rate of 4 per
cent this year.”
Neil Wilson, investor strategist at Saxo UK
“It’s about time the Bank got on with it. A cut was a done
deal, but the question now is how far does the Bank of England go
– while today’s cut was easy, it gets harder from here. Our
inclination is that the BoE needs to cut further than the market
has been expecting, perhaps as low as 3 per cent, vs the 3.5 per
cent priced ahead of this decision. Demand-driven inflation is
not really the issue as tax hikes will continue to squeeze
spending.
“The calculation for the Bank is not straightforward – but it
seems right to err on the side of caution given the precarious
economic outlook and fiscal situation. Unemployment has
risen above the Bank’s forecasts and growth is weaker. Latest
data for June showed that the unemployment rate rose to 4.7 per
cent in the three months to May, the highest level since June
2021. But services inflation, a key one for the
BoE, remains stubbornly high at 4.7 per cent. That is above
even the level expected by the BoE coming into the autumn.
Headline inflation has also ticked up to 3.6 per cent but the BoE
was anticipating inflation to pick up through the year.
“Governor Andrew Bailey gave a strong signal to the market two
weeks ago by saying that he believes “the path is downward” on
rates. On the whole, while we favour the Federal Reserve seeing
inflation further away from target than employment, the Bank of
England is on the other side with the labour market and slowing
growth the key concerns. It is also no doubt fully aware that tax
hikes are coming, which will further squeeze the economy, jobs
and spending power.”
Neil Birrell, chief investment officer, Premier Miton
Investors
“The base rate is at a level we’ve not seen for well over two
years, but the voting by the committee only just got the cut
through. The question now may be whether this cut has come too
late. Growth has been weak for some time, the jobs market is
under pressure from higher employment costs, tax rises are on the
horizon, consumer spending is lacklustre, and confidence is low.
Also, the cut is priced into gilts so government borrowing costs
won’t now be falling. Now we are on the path to lower rates, it’s
all about future policy, and the inflation versus growth
challenge hasn’t gone away. From this vote it’s not clear whether
economic growth will be a focus.”
Luke Bartholomew, deputy chief economist, at
Aberdeen
“An interest rate cut today was almost universally expected,
except it seems at the Bank of England itself where the voting
patterns reveals a very close decision, which required a second
round of voting before a majority could be found. The tight
decision reflects the conflicting forces facing policymakers,
with inflation proving stronger than expected but activity growth
remaining weak. It will be difficult for the Bank to give clear
guidance about the likely path of rates from here given the messy
data and divided MPC. But in the end, we expect the
weakness of growth to win out, and for the Bank to cut rates
again later this year, and then through next year as well.”
Andy Jones, Janus Henderson
“As was widely expected, and with a split vote, the MPC lowered
the UK bank rate by 0.25 per cent to 4.0 per cent. While
inflation has remained elevated, the labour market has weakened
over the last few months and economic growth has been lacklustre.
We still expect further cuts in due course but would anticipate a
hold in rates at September’s meeting as the committee members
await clearer signals on inflation from the data.”