Investing & Performance | 19 September 2025

interest rate watch - september 2025

The US central bank cuts interest rates for the first time this year with suggestion of further rate cuts to come.

The US Federal Reserve cut interest rates by 0.25% at its September meeting, marking its first rate reduction in 2025. The Bank of England and European Central Bank held rates unchanged as focus remains on taming inflation.

The US Federal Reserve (Fed) lowered rates to 4.25%
The Bank of England held rates at 4%
The European Central bank held rates at 2.15%
The Bank of Japan held rates at 0.5%

Past performance is not an indicator of future performance and should not be relied on as such. The value of investments can fall as well as rise, and you may not get back the full amount you invest.

Fed’s first rate cut in 2025

The Fed committee paused its rate cutting cycle in recent months following US President Donald Trump’s tariffs announcement in April. The impact of tariffs on the economy and inflation has been subdued. US inflation rose to 2.9% in August, up from 2.7% the month before. This was in line with forecasts which provided some breathing room for the Fed to lower rates this time round.

A key factor for the Fed’s decision to lower rates was the cooling of the US labour market. Following several months of lowered revisions to jobs numbers, non-farm payrolls showed only 22,000 jobs were created in August. This is down from the 79,000 jobs created in July.

Fed Chair Jerome Powell acknowledged the softening of the labour market, labelling the change as a ‘risk management cut’. Though not reflected in terms of the unemployment rate, a weakening labour market could help contain wage growth and limit upside risks on inflation.

Bank of England – unchanged

The UK central bank left interest rates untouched at September’s meeting after inflation reaffirms its stickiness in 2025 and economic activity slows. Inflation held steady at 3.8% in August, unchanged from July. Drivers included higher food and drink prices which rippled through to the hospitality sector.

Government bond yields have slowly edged higher this year with long-duration bonds reaching a 27-year high. To try and curb this rise, the BoE plans to tighten its bond-selling programme from £100 billion to £70 billion.

Our view

The Fed’s priorities are shifting from inflation to the US labour market. As long as inflation doesn’t spiral, the main priority for the central bank’s interest rate roadmap will be to keep unemployment low if job creations aren’t growing. This will be an alternative method to keep inflation down as fewer job creations should mean lowered wage growth.

Chair Jerome Powell hinted towards two further rate cuts before the year’s end with the possibility of just one rate cut next year. This will very much be dependent on future data reports as any decline in economic growth or employment levels could be a catalyst for further rate cuts in 2026. This gives the central bank optionality to be agile should the state of the economy or labour market deteriorate.

From an investment perspective, equities typically perform well in a lower interest rate environment provided the US economy continues growing at a healthy pace. The S&P 500 made modest gains the day after the rate cut in light of the dovish outlook by the Fed for the remainder of the year.

If the labour market continues to show signs of softening, the Fed could reduce interest rates further. This should lower bond yields meaning prices rise. Therefore, government bonds could play a pivotal role within a multi-asset portfolio, offering downside protection should conditions cool further.