Originally Posted 23 September 2025 – Monthly Cash Review – GBP State Street GBP Liquidity LVNAV Fund, August 2025
GBP INVESTMENT UPDATE – AUGUST 2025
The Bank of England (BoE) Monetary Policy Committee (MPC) cut the base rate from 4.25% to 4.00% at its 7 August meeting. This was only achieved after a second round of voting broke a 4-4 deadlock — a 5-4 decision was secured after Alan Taylor changed his original vote for a 0.50% cut to a 0.25% cut.
Economic Data
- Headline inflation rose from 3.6% in June to 3.8% in July, versus consensus expectations of 3.7%. This was mainly driven by an increase in energy prices. Services inflation rose from 4.7% to 5.0%, above the BoE’s forecast of 4.9%, while food inflation increased from 4.6% to 4.9%.
- GDP for June rose by 0.4%, stronger than consensus expectations for growth of 0.1% and reversing the 0.1% declines registered in both April and May. Industrial production recorded a 0.7% gain, with increased demand for military-related products and electric vehicles a contributing factor. Services output reported 0.3% growth.
- GDP for Q2 2025 grew by 0.3%, outpacing less upbeat expectations given some activity had been pulled forward into Q1 from Q2 ahead of anticipated increases in US import tariffs and a rise in UK stamp duty charges on 1 April.
- The S&P Global composite purchasing managers’ index (PMI) rose from 51.5 in July to 53.0 in August, beating consensus expectations of 51.6 — this is above the 50 level that is indicative of growing economic activity. The increase was almost entirely driven by a rise in the services PMI from 51.8 to 53.6. The manufacturing PMI output balance remained unchanged at 49.5 and the employment PMI reading increased from 45.3 to 46.4.
- The unemployment rate for June remained steady at 4.7%. Private sector regular pay growth eased from 4.9% to 4.8%, keeping it broadly on track to meet the BoE’s forecast of 4.6% for September.
Markets
Guidance issued by the MPC dropped the previous reference to policy being kept “restrictive for sufficiently long”. Instead, it stated that the “restrictiveness of monetary policy had fallen as Bank Rate had been reduced”. BoE Governor Andrew Bailey noted the decision was finely balanced, and while the direction of travel for the Bank Rate had not changed, the path of easing had become more uncertain. The MPC judged that the “upside risk around medium-term inflationary pressures” had risen with Governor Bailey noting the importance of the MPC not cutting “Bank Rate too quickly or by too much” and that the MPC must be careful that higher food and energy prices do not lead to second-round effects.
The BoE made little change in its medium-term GDP forecasts. The bank revised its inflation forecast to now peak at 4.0% in September from a previous estimate of 3.7%, though this is expected to fall back to 3.6% by the end of the year. The upward revision was driven by an increase in food and non-alcoholic beverages inflation, with other components little changed. Inflation is now forecast to return to the 2% target by Q2 2027, rather than the previous expectation of Q1 2027. The BoE also estimated that quantitative tightening (QT) was having a larger impact on 10-year bond yields than previously thought, suggesting that the central bank may slow down the pace of QT from £100bn per year.
The focus for economic data returned to inflation as rising prices has prompted the market to lower expectations around interest rate cuts. While the pickup in inflation was expected, higher food prices have a direct impact on household inflation expectations. From a GDP perspective, the economy is not expected to grow at the same pace as that achieved in Q2 2025. The weak global economy is likely to remain a drag on UK activity and speculation about more tax increases in the Autumn Budget will probably keep consumers in a cautious mood. In that respect, the composite PMI data is consistent with GDP growth slowing in Q3 2025. The unemployment rate has remained stable, but the labour market has been loosening with wage growth easing. The expectation is employment weakness will lead to an easing in services inflation.
Speculation around the upcoming autumn budget was also a feature in the month. Chancellor Rachel Reeves is expected to raise taxes, with the property market in focus as she seeks to boost tax receipts and improve economic prospects. There have been other suggestions such as bank levies, inheritance tax changes, and charging landlords national insurance on rental income. The evolution of data remains the main factor for interest rate decisions, given the BoE’s data-led approach. Market implied rates (Figure 1) for September finished the month at 3.97%, meaning the market expects the base rate to remain at 4.00%. The implied rate for December ended August at 3.86%, suggesting that the market is split on whether there will be one more rate cut before the end of 2025.
Past performance does not guarantee future results.
Fund
The hawkish tone of BoE messaging following the August meeting drove a reduction in market expectations of further interest rate cuts. Market attention also shifted focus to the higher CPI inflation print, with concerns growing over what the upcoming Autumn budget might contain. The result of this was higher gilt and money market yields. With the fund having already locked in duration prior to the BoE meeting, investments were shortened, taking advantage of the high-yielding, short-dated issuance from sovereigns, supranationals, and agencies. Fund liquidity requirements, both overnight and weekly, remained well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund credit rating exceeded requirements at all times.
Past performance does not guarantee future results.
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