Chris Arcari, Head of Capital Markets at hymans Robertson says: “Markets expected a 0.25% pa rate cut today, with another two and three more cuts to follow in 2025. While inflation is forecast to accelerate in 2025, at least a portion of that is expected to be linked to energy prices, and, therefore, be temporary. Indeed, recent currency appreciation against the dollar and sharp falls in commodity prices have taken a little of the pressure off headline inflation. That said, domestic inflation pressures persist; average wage growth is still running at close to 6% year on year; inflation in the labour-intensive services sector is at 4.7% year on year; and core inflation, at 3.4%, remains well above the central bank's 2% target. However, while we expect the Bank of England may be slightly more cautious than the markets expect (between two and three 0.25% pa rate cuts in 2025 feels more likely than forecasts of almost four), central banks must set policy based on the balance of risks to growth and, therefore, inflation. Tariffs have skewed these risks more sharply to the downside. US tariffs are both a supply and demand shock to the US. For other economies, US tariffs mainly represent an external demand shock, with a more ambiguous impact on inflation. Falls in commodity prices and currency appreciation against the dollar will lower headline inflation, while some imported goods could become cheaper as exports previously destined for the US enter non-US markets. On the other hand, the scale of US tariffs could damage global supply chains, raising inflation. For this reason, we expect central banks to prioritise the risks to growth over the near-term risks to inflation.”
Simeon Willis, Chief Investment Officer at XPS Group said: “The interest rate reduction will be welcomed by most pension scheme investors. Long-term inflation expectations fell following President Trump's tariff announcements, possibly reflecting expectations of lower-cost imports being diverted to the UK instead of the US. March inflation also came in lower than forecast, though it remains above the Bank of England's target. These factors have set the scene for a gradual easing of interest rates, supporting a UK economy increasingly focused on finding new sources of growth. 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.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “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. For borrowers, particularly those on variable rate mortgages or approaching the end of a fixed term, today’s rate cut will come as welcome news. Lower interest rates mean reduced monthly repayments, easing financial pressure for many households. However, with ongoing cost of living challenges still front of mind for many, particularly in the context of April’s bill rises, any savings will likely go towards covering immediate expenses rather than discretionary spending. Those with unsecured borrowing like credit card balances may also benefit, though lenders often pass on cuts more slowly in these areas. For savers, however, there’s a more complex picture. Cash savers may find returns begin to erode in real terms, particularly if inflation remains above the Bank’s 2% target. While it’s important to maintain a level of accessible, cash-based savings for emergencies, those with longer-term goals might consider investing to help make their money work harder. Although investing carries more risk, it can lead to greater returns and has the potential to beat inflation over a number of years. For those able to take a longer-term approach, saving into a pension offers the benefits of investing as well as significant tax efficiency.”
Julius Bendikas, Mercer’s European Head of Economics and Dynamic Asset Allocation, said: The Bank’s Monetary Policy Committee faces a tricky balancing act with inflation and wages still elevated. Global trade issues are likely to put downward pressure on both growth and inflation. We expect the Bank to keep cutting rates, reaching 3.5% or lower by 2026, as price and wage inflation moderate further.
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