Cio update

CIO update – central bank spotlight

The latest interest rate decisions and updated economic outlooks from two key central banks show continued uncertainty. But do we need 100% clarity?

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14 May 2025

Our view

UK inflation pressures ease

UK inflation peaked at 11% back in 2022, sparking the need to raise interest rates. Since then, inflation has been on a downward trajectory, enabling the BoE to immerse itself in a rate cutting cycle. However we’re not out of the woods yet.

Prices rose by 3.4% for the year to March and are expected to reaccelerate to 3.7% by September. Rising energy prices will be a contributing factor for this spike, although inflation is forecast to drop to the 2% target by 2027.

We still see some uncertainty about how tariffs will impact inflation despite the UK being the first to secure a trade deal with the US since ‘Liberation Day’. The deal relieves tariffs against car and steel exports, but a flat 10% levy on other goods remains in place. Greater clarity is needed on how businesses and consumers respond to these tariffs to paint a clearer picture of the impact.

Fed plays the waiting game

The US economy has shown continued resilience amid the tariff turmoil, with job creation and economic growth still in good health. GDP for Q1 2025 declined, but this was significantly skewed by the front running of imports ahead of tariffs being implemented.

That said, the Fed also sits in a grey area as more ‘hard data’ is needed to determine the full impact of tariffs. Both inflation and employment levels could pay the price of the import levies, however this isn’t guaranteed and we will need to wait for future data to get a clearer picture. For now, in our view, the Fed has a degree of optionality until greater clarity is reached and is well placed to support markets if necessary.

Markets recover post liberation day

While we await further clarity, we must be clear that we aren’t expecting a completely transparent picture of what’s to come. Financial markets can never be 100% certain. This means we still need to be able to accept risk within portfolios.

Despite all the economic uncertainty, stock markets have rebounded – and faster than many had expected. As detailed in the graph below, the MSCI All Country World Index (MSCI ACWI) in US dollars has recovered its losses from April and has surpassed its levels from just before Liberation Day.

Source: MSCI, Macrobond, Coutts. As at 12 May 2025. Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should c

Our approach

This reinforces the importance of remaining calm amid volatility. Our investment process during April guided us to remain invested in global equities given their attractive expected returns compared to other assets. Whilst our process did not guide us to increase our equity exposure, more importantly it was not a time to sell either, meaning we were able to capture the subsequent upward swing.

It’s worth noting though that the chart above is denominated in US dollars. The dollar has been weakening which means global equities are not performing as well once translated into sterling. Our portfolios have mitigated some of this risk by being overweight sterling, hedging against the declining dollar. This move supported our portfolios by providing enhanced diversification.

In addition to our currency hedge, we continue to hold our liquid alternatives fund which typically performs independently from stocks and bonds. Given the clouded outlook for the remainder of the year, diversification within our portfolios remains paramount.

Speak to us

If you are a Coutts client and would like to discuss market developments or your own investments with us in more detail, please contact your private banker.

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