The Bank of England (BoE) cut interest rates to 4.25 per cent – the lowest for two years – sparking widespread concern across the investment industry about future higher inflationary pressure.
Despite signing a “breakthrough” trade deal with Donald Trump which should keep the cost of goods down, the UK government still faces a challenging period ahead.
George Brown, Senior Economist, Schroders, says:“Going forward, the Bank of England has far less scope to cut rates than the market currently expects. While Trump’s tariffs will provide some marginal relief through lower goods prices, the fundamental issue for the UK is that it continues to face considerable capacity constraints. As such, inflation looks set to rise again later this year as a result of disappointing productivity and sticky wage growth. To our minds, this is consistent with the Bank only taking interest rates as low as around 4 per cent this rate-cutting cycle.”
However, many predict the government will continue to lower rates, although the result of recent National Insurance increases is yet to be felt in the economy.
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, says: “This is the second significant move by the MPC in 2025 and maybe not the last following lower than expected March inflation and sluggish economic growth.
“Uncertainties remain around any inflationary impact of April’s employer National Insurance increase, market uncertainty following the US tariffs and wider geopolitical issues however some forecasters predict a series of rate cuts in the year ahead.”
This view is echoed by Lindsay James, investment strategist at Quilter, who says investors are betting on three further rate cuts this year as “rising risks to growth look likely to supersede inflationary threats in the coming months”.
Further rate cuts would, according to Simeon Willis, Chief Investment Officer at XPS Group, be welcomed by most pension scheme investors despite the possibility of higher liability values.
“Traditionally, lower interest rates are seen as negative for pension schemes, because they increase the value of liabilities. But with most schemes now well-funded and highly hedged, many are less concerned with falling yields. In fact, persistently high long-term yields have created friction, creating operational challenges which constrains the ability to maintain exposures to illiquid growth assets. What schemes want now is stability, combined with sustained growth to support the long-term value of their credit and other risk assets, maintaining funding levels. Economic growth sits at the heart of this desirable scenario.”
