BoE votes to hold rates, Fed cuts for the first time this year

Bank of England

At its September meeting, the Bank of England (BoE) committee voted to leave interest rates unchanged at 4.0%, by a majority of 7:2, as was expected by the market. While growth remains anaemic and the labour market continues to weaken, albeit relatively slowly, Consumer Price Inflation (CPI) remains uncomfortably high. August CPI came in at 3.8% and is projected to rise further in September to around 4.0%. There is a wide range of views among committee members about the “balance of risks to inflation and the most important factors driving it”, but overall, there is a broad consensus that risks are skewed towards higher and more persistent of inflation over the medium term. Despite this, the committee retains its bias towards a “gradual and careful approach to the further withdrawal of monetary policy restraint”.

Given the recent trajectory of inflation, markets have now all but priced out an interest rate cut in November, and the probability of a further interest rate cut this year now sits around 10%.

Over the past 12 months, markets have interpreted this to be one interest rate cut per quarter. However, given the recent trajectory of inflation, markets have now all but priced out an interest rate cut in November, and the probability of a further interest rate cut this year now sits around 10%. Given inflationary pressures, other aspects of the economy, most notably the labour market, will need to deteriorate significantly from here over the next few months to see any chance of a further cut in 2025 being priced back in. The market will also be paying close attention to the upcoming budget in November, and the potential impact fiscal policy choices might have on inflation during the first half of 2026. What hasn't changed is the market pricing of the longer-term neutral rate, which has remained around 3.5% for some time. For investors in shorter maturity gilts, this is ultimately more important than the exact timing of interest rate cuts.

But September’s meeting was never really about the BoE’s decision on interest rates. Of far greater importance to bond markets was the BoE's decision with respect to its quantitative tightening (QT) program. The QT program is selling the bonds that were bought by BoE under their Quantitative Easing (QE) program back into the market. Although we felt the BoE should cancel active QT entirely, we thought that might be a step too far and expected the BoE to find a middle ground between maintaining total QT at £100bn per annum and stopping entirely. On this element of the operation they delivered, announcing that the Bank’s ownership of gilts would be reduced by a total of £70bn between September 2025 and September 2026.

And finally, the market was looking to see whether the BoE would stop selling longer maturity gilts. The UK debt management office (DMO) has drastically reduced the percentage of long-dated bonds its selling to the market as part of its ongoing financing operations given the changing demand dynamics, the steepness of the curve and the outright level of yields. The market had hoped the BoE would follow suit by excluding long-dated gilts from its active QT program, but once again, it chose a middle ground, targeting 20% of the active sales in long-dated gilts. In our view, this is  a missed opportunity by the BoE, perhaps to show alignment with the DMO, and inject further confidence into the market and help stabilise the longer end of the curve. Ultimately, however, the amounts being discussed are comparatively small, and the market was relatively stable in the immediate aftermath of the announcement.

Federal Reserve

The Federal Reserve cut rates by 25bps on 17 September 2025, bringing the federal funds target range down to 4.00–4.25%. The vote was 11-1 in favour of the interest rate cut. The newly appointed committee member was the only dissent advocating a deeper 50bps cut. This 25bps interest rate cut marks the first move since December 2024. Chair Jerome Powell described the move as a “risk management” decision, reflecting growing concerns over a softening labour market, and somewhat elevated and persistent inflation. The Fed’s updated projections suggest two more interest rate cuts could be on the cards for the rest this year, though Powell was quick to downplay the dot plot’s predictive power, urging observers to treat it as a probability map rather than a promise.

In our view, risks remain finely balanced. On the downside, employment data has weakened, with slower payrolls growth and a modest uptick in unemployment. On the upside, inflation is still sticky, with core Personal Consumption Expenditure (PCE) expected projected to end 2025 at 3.1% and 2026 above the Fed’s 2% target. Powell acknowledged the labour market is no longer “very solid”, marking a notable shift in his tone from previous meetings.

The issue of central bank independence raised its head, with Powell facing questions about political interference. Despite pressure from US President Donald Trump and the controversial nomination of Stephen Miran, Powell maintained that the Fed’s dual mandate and accompanying decisions are rooted in data, not politics. He refused to comment on the legal challenges surrounding Governor Lisa Cook, keeping the focus squarely on policy.

Interestingly, there was very little change in the shape of the yield curve suggesting that the market is keeping faith that the Fed will cut interest rates over the coming meetings despite inflation remaining sticky.

In the US treasury market, the reaction was mixed. Short-dated yields initially fell in line with the interest rate cut but unravelled quickly and ended the day higher. This reaction was echoed further out the yield curve at both the 10-year and 30-year point. It had felt as if the market was anticipating too much in the way of a dovish message and the balanced comments from Powell took the shine off a US treasury market that had been getting ahead of itself. Interestingly though there was very little change in the shape of the yield curve, suggesting that the market is keeping faith that the Fed will cut interest rates over the coming meetings despite inflation remaining sticky.

Looking forward, the markets are pricing in 50-75bps of cuts by year-end, but Powell’s cautious tone signals a meeting-by-meeting data-dependent approach. The Fed is walking a tightrope between slowing labour growth and stubborn inflation, with political noise adding complexity. For now, Powell’s message is clear: strong arguments backed by data will guide the path, not external pressure. Perhaps the markets need to focus more on the probabilities as opposed to a false political promise.

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