Interest rate watch - August 2025

Over the past 12 months, global economic growth has moderated, prompting most developed market central banks to start easing monetary policy. Japan stands as a notable exception, where policymakers have been raising rates in response to a sustained rise in inflation.

Central bank base rates and market expected rates - July 2025

Base rates as a % since 2014, dashed line represents expected rates based off futures markets. Source: Bank of England, European Central Bank, Bank of Japan, Federal Reserve, Macrobond, Bloomberg, Coutts. Data accurate as of 16/07/2025.

UK interest rate cut: the implications

The market consensus correctly anticipated that the Bank of England’s Monetary Policy Committee (MPC) would reduce the base rate by 25 basis points to 4% on Thursday. However, it was the first ever two-round vote by officials, providing evidence of diverse opinions.

Ultimately the decision reflects a softening economic backdrop, particularly evident in housing market indicators from both the construction and mortgage sectors, which point to subdued activity in the first half of the year.

In this context, rate cuts may serve to stimulate growth, especially following the conclusion of the stamp duty holiday earlier this year.

Labour market conditions support lower central bank rates

Labour market dynamics also support this more accommodative stance. The unemployment rate has risen to 4.7%, according to Office of National Statistics, while wage growth has fallen short of Bank of England (BoE) projections - both factors that provide room for further easing.

Inflation remains a key consideration

Nonetheless, persistent inflation presents a nuanced challenge. The BoE has previously signalled its willingness to look through temporary inflationary pressures, anticipating a mid-year uptick. While this stance likely remains intact, policymakers will be closely monitoring the more entrenched components of inflation as they calibrate their response.

Our view

We expect the BoE to continue its gradual easing cycle, with further rate cuts likely into 2026.

The BoE’s own guidance suggests a willingness to look through short-term inflation volatility, and we believe inflation will continue to trend lower over the medium term, allowing for interest rates to continue to fall.