A three-way split

In its May 2025 meeting, the MPC voted to lower the Bank Rate by 25bps to 4.25%.  The decision was influenced by the ongoing progress on disinflation in the UK, as evidenced by the decline in the 12-month Consumer Price Index (CPI) inflation measure, to 2.6% in March. Two MPC members (Swati Dhingra and Alan Taylor) favoured a larger cut due to global trade concerns and fears of maintaining an overly restrictive monetary policy.  In contrast, two other members (Catherine Mann and Huw Pill) voted for unchanged rates, citing labour market resilience and lingering inflation concerns.

Despite progress on disinflation, the MPC remains cautious due to persistent risks, including elevated wage growth and weaker demand due to global trade policy uncertainty. The Committee retained its commitment to a "gradual and careful approach" in easing monetary policy restraint, reflecting its goal of ensuring that inflation returns sustainably to the 2% target in the medium term.

Revisions to growth and inflation

The MPC updated its forecasts, reflecting the evolving economic conditions and challenges posed by both domestic and global factors. The Committee trimmed its peak inflation forecast from 3.7% to 3.5% in the third quarter of 2025.  Inflation is projected to fall at a faster pace than earlier forecasts, by an average of 0.25% and undershooting the 2% target slightly over a two- and three-year horizon.

The MPC also adjusted its growth forecasts, with 2025 GDP growth now projected at 1%, up from the February forecast of 0.75%, partly due to stronger growth in the first three months of 2025. The 2026 growth forecast has been downgraded to 1.25% from 1.5%, reflecting the impact of both domestic and global factors, including uncertainties surrounding global trade policies and their potential effects on UK activity.

Conclusion

The MPC's decision to lower the Bank Rate to 4.25% reflects satisfaction with disinflation progress, yet the hawkish voting pattern suggests caution in future policy actions.  With the bank apparently unwilling to commit to a more rapid pace of cuts, and emphasising its decisions will be data dependent, interest rate volatility is likely to remain high.

For GBP cash investors, the rate cuts imply lower cash yields, but elevated interest rates continue to offer attractive current yields.  We anticipate future central bank actions will be rate cuts, suggesting investors would benefit from a slight extension of duration, although we remain cautious due to heightened market uncertainty and volatility.

The J.P. Morgan Global Liquidity GBP strategies are well positioned following the rate cut, thanks to our strategic decisions to extend our weighted average maturity (WAM), and diversify across instruments and sectors, while maintaining high levels of liquidity.