The Bank of England’s Monetary Policy Committee (MPC) is widely expected to announce a cut to interest rates tomorrow, but the bigger question for investment managers is not whether a cut is coming — it’s what the Bank signals about the path ahead.
Diverging forecasts point to policy uncertainty
While a rate cut looks more likely than not, there’s little agreement on the scale of the move. Markets have priced in a 25bps reduction, but the narrative remains fluid. Canada Life Asset Management’s Steve Matthews suggests a larger cut is “firmly on the agenda” in light of a changed macro backdrop — including slowing U.S. growth, trade disruption, and UK CPI inflation now in line with target.
Still, Matthews expects the MPC to opt for a more cautious 25bps move to 4.25%, reflecting lingering concerns over wage growth and sticky services inflation. “We continue to expect a steady, quarterly pace of rate cuts through 2025 as policymakers balance support for growth with lingering inflationary pressures,” he said.
BNY’s Bob Savage, focusing on global central bank moves, sees no change from the Bank this week and anticipates July as the more likely timing for a first cut. “Our central forecast is for two cuts this year,” he said, adding that further easing would depend on a deeper economic deterioration in H2.
Tariff risk muddies the investment outlook
One of the most significant variables for policy — and by extension, for asset allocation decisions — is the fallout from U.S. trade policy. Donald Trump’s return to tariff threats has introduced a new layer of uncertainty that the Bank of England must now factor into its economic modelling.
Laith Khalaf, Head of Investment Analysis at AJ Bell, warns that tariffs could unleash both inflationary and deflationary forces simultaneously. “Expectations of a global economic slowdown have prompted a large fall in the oil price,” he said, pointing to a 9% forecast drop in the UK energy price cap this summer. “The Bank of England may be forced to revise its inflation outlook down — or at least soften its tone.”
At the same time, Khalaf warns that second-order effects, such as a stronger dollar or changes in global trade flows, could introduce fresh volatility. “If you had to draw the possible paths for the global economy right now, it would bear a striking resemblance to Mr Messy,” he said, adding that forecasts are especially vulnerable to correction.
Yields, curves and duration considerations
Jeff Brummette, CIO at Oakglen Wealth, believes a base rate cut is “nailed on” — but says investment strategy should be focused less on the cut and more on forward guidance. “We expect the front end of the yield curve to continue performing well, with a steepening bias likely,” he said.
Indeed, a steeper yield curve — particularly if driven by downward moves at the short end — could support short-duration fixed income positions and provide tactical opportunities in gilt markets. But any surprise hawkishness from the Bank, whether in the vote split or the tone of its guidance, could prompt a repricing.
Implications for credit, SME lending and business sentiment
Theo Chatha, CFO at Bibby Financial Services, flagged that 62% of SMEs report they would feel more confident investing if rates fall — highlighting the sensitivity of UK business confidence to monetary easing. However, he added that “a cut no longer holds the promise it once did,” given the potential for policy reversal if inflationary risks re-emerge later in the year.
“SMEs can’t afford a ‘wait and see’ approach,” said Chatha. “Businesses that continue to invest and plan for every scenario will stay ahead of the competition.”
Also in the ‘cut’ camp is Ranjiv Mann, Senior Portfolio Manager at Allianz Global Investors, as he explains saying: ” The UK economy grew by just 1.1% in 2024 and 2025 is unlikely to be much better. Sentiment on the UK outlook for 2025 has soured in recent months as companies struggle with the rise in employers’ national insurance contributions and the minimum wage. Recent US trade policy uncertainty has added to these concerns, upending economic growth expectations not just in the UK, but globally. The current market consensus has shifted to reflect these concerns, with another sub-trend UK growth year being priced of just 0.7%.
“The direct hit from US tariffs on UK growth is likely to be relatively small and the UK remains open to trade negotiations with the US. However, an escalation in the trade war between the US, the EU and China will be a hit to UK export growth prospects, with UK business investment also likely to be impacted by the uncertain growth backdrop.
“Survey evidence suggests that the UK labour market is cooling, while recent consumer confidence survey data suggests households are also dialling back their optimism on the UK outlook. Inflation remains a key risk facing the UK economy, with core CPI inflation still running at 3.4% y/y and services inflation at 4.7% y/y, but we expect underlying services inflation to slow as wage pressures ease. The disinflationary impulse from China, as it dumps its goods onto European markets, should also support the UK inflation outlook.
“Meanwhile, on the fiscal front, the UK government once again committed itself to its fiscal rules in the March Spring statement – a tightening policy stance which will also weigh on UK growth prospects.
“At the March BOE policy meeting, there was an 8-1 vote to keep the Bank rate unchanged at 4.50%, signalling a cautious approach to future rate cuts and a bias to maintain a restrictive stance given inflation concerns. However, we think that growing trade policy uncertainty is likely to shift the dialogue within the policy committee towards a more dovish stance as fears of a demand shock ultimately feeds into a weaker UK inflation outlook.
“The UK growth and inflation outlook, along with the current monetary and fiscal policy stance, provides an attractive outlook for Gilts both on an outright and cross-market basis versus other G10 bond markets.”
Investment strategy takeaway: focus on flexibility and forward guidance
For investment managers, this week’s rate decision is less about the base case — a 25bps cut — and more about scenario planning. The policy path beyond May remains highly data- and risk-dependent. Global trade developments, wage trends, and inflation expectations all remain in flux, and asset allocations will need to reflect that uncertainty.
With swap rates falling and mortgage pricing turning more competitive since Trump’s “Liberation Day” tariff announcements, there is a sense that markets are already leaning into the easing narrative. But the MPC’s commentary — and any upward revisions to growth or downward tweaks to inflation forecasts — could quickly reshape that outlook.
On balance then, it seems that an interest rate cut is highly probable — but investment managers should be more focused on the Bank’s tone, the voting split, and its inflation outlook. Markets may be anticipating a smooth easing cycle, but the Bank’s challenge is to stay nimble in the face of geopolitical and economic shocks, which look set to continue as Trump’s tariff campaign continues to shock.
