Originally Posted 20 August 2025 – Monthly Cash Review – GBP
There was no Bank of England (BoE) Monetary Policy Committee (MPC) in July with the next meeting scheduled for 7 August.
Economic Data
- Headline inflation rose from 3.4% in May to 3.6% in June, versus consensus and BoE expectations of no change, with the core inflation rate rising from 3.5% to 3.7%. The increase was driven by higher core goods prices, with food price inflation ticking up from 4.4% to a 16-month high of 4.5%. Services inflation remained at 4.7% in June, which topped the BoE expectation of 4.6%.
- GDP for May fell by 0.1%, falling short of consensus expectations for growth of 0.1%.
- The S&P Global composite purchasing managers’ index (PMI) fell from 52.0 in June to 51.0 in July. Although this was above the 50 level that is indicative of growing economic activity, the latest reading was below consensus expectations of 51.7. This decline was entirely driven by a drop in the services PMI from 52.8 to 51.2. The accompanying press release noted that goods producers widely reported a negative impact on global demand for manufacturing items in the wake of US tariff announcements. The employment PMI fell from 46.6 to 45.1.
- The unemployment rate for May increased to 4.7% from 4.6% in April. Private sector regular pay growth, a focus for the BoE, fell from 5.2% to 4.9% — this leaves it below the Bank’s forecast of 5.2% for June 2025.
Markets
Without a BoE MPC meeting in the month, the focus was on economic data. Inflation for June surprised to the upside, but the BoE is likely to take into consideration the impact played by higher airfares and that core goods is undershooting relative to the May forecast. The inflation data provided some evidence that businesses are responding to higher National Insurance Contributions and the new minimum wage by raising prices. However, the stickiness of services inflation may be more of a concern, prompting certain MPC members to retain a cautious outlook. On the other hand, the small increase in the services output PMI is consistent with services inflation slowing. Even so, inflation is expected to rise further in the near term, potentially peaking in September before falling back.
One positive aspect is that data shows the labour market is loosening. Businesses are offsetting cost increases by reducing headcounts, which suggests that the rise in inflation will not support wage growth. The fall in the PMI employment balance provides more evidence that actual payroll employment is declining. The contraction in GDP for May followed a drop in April to further reverse some of the 0.7% growth achieved in Q1 2025 — that expansion was primarily due to increased activity ahead of the anticipated rises in US import tariffs. The 10% tariff on UK exports to the US is unlikely to have a materially negative impact on UK GDP, but there may be an indirect influence from a slowdown in global GDP growth. July’s composite PMIs suggest that the economy is struggling with slowing activity and that the economy only grew by 0.1% in Q2 2025. The data releases are indicative of GDP flatlining at the start of the third quarter.
Market implied rates (Figure 1) for August finished the month at 3.98%, meaning the market was fully pricing in an interest rate cut from the current base rate of 4.25%. Despite the higher-than-expected inflation figures, the main considerations for the BoE are likely to be that the labour market continues to weaken, price pressures continue to ease, and economic activity remains low. The market implied rate for December ended July at 3.74%, suggesting one additional rate cut before the end of 2025.
Public sector net borrowing was well above the Office for Budget Responsibility (OBR) forecasts, with tax income below the OBR’s projection suggesting that recent weakness in the labour market is weighing on receipts. The higher inflation levels contributed to an increase in debt interest payments. These factors, combined with the government’s reversal on spending cuts, means the Chancellor will probably need to raise £15-25 billion in the Autumn Budget to maintain the £9.9bn of headroom against the fiscal mandate.
Past performance is not indicative of future results
Forecast are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
Fund
With no Bank of England policy meeting in July, the market focus was on the 7 August meeting where expectations are for a 25 basis points cut in the base rate. With this expectation, GBP yields moved lower during the month. Although the market is pricing in another interest rate cut for 2025 after August, taking the base rate to 3.75%, longer-term yields in excess of 4.00% were on offer. Duration was added to lock in longer-term yield which increased the fund’s weighted average maturity (WAM) to around 40 days by month-end. 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 is not indicative of future results
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