August 2025
Market Commentary
The Bank of England cuts interest rates - one and done?
(3 min read)
18th August 2025
On 7th August, the Bank of England narrowly voted to cut interest rates from 4.25% to 4.0%. The Monetary Policy Committee (MPC) voted in favour of a cut by a margin of 5:4 – not only was this an unusually close call, but the result of the first ‘re-vote’ in its 28-year history – reflecting a division or lack of consensus about the outlook for the UK economy.
The issues at stake are that economic growth remains anaemic at 1.2% year-on-year, although the fastest among the G7 for the first six months of this year, and inflation remains stubbornly high and above target at 3.6%.
The recent Royal Institute of Chartered Surveyors (RICS) data suggests the housing market, which has a strong multiplier effect in terms of engaging many areas of the overall economy, has been somewhat soft.
In addition, the rise in National Insurance which took effect in April has put pressure on the labour market at a time when a rise in the minimum wage and higher public sector wage rounds has kept average earnings elevated (see chart below).
A slow economy and sticky inflation, known as stagflation, are the worst of dilemmas for policy makers at the Bank of England particularly given that its mandate is to maintain inflation at 2%.
Chart 1
UK Average Earnings 2001-2025
Source: Office for National Statistics (ONS)
With this background one would expect the MPC to remain on hold until there is some confirmation that inflation is slowing towards target. However, there is significant uncertainty around the Budget in October. How will the Chanceller maintain her fiscal rules and plug the £50bn black hole? There is a risk that the Budget could be negative for economic growth and bring future interest rate cuts back into the equation.
What does this mean for client portfolios?
Our client portfolios are well positioned for a potentially precarious economic backdrop. We remain cautious on interest rate risk within fixed income markets, preferring shorter maturities, and focused on equities where companies have robust balance sheets and strong long-term business models.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
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