Equity Research; 2025 Rate Cuts ahead?
2025: Rate cuts ahead?
Conjecture about interest rates has returned in Q2. Many investors view the actions of global central banks as offering ‘downside protection’ given the multiple challenges facing world economies.
It is reasonably clear the European Central Bank (ECB) wants to shield the continent from the global environment via a loose monetary policy. Influential voices on the ECB governing board have urged a responsive, flexible approach as a counter to a volatile global environment. This approach has drawn capital and a rotation into Europe.
However, German gross domestic product (GDP) growth has been stagnant in Q2 2025 and US tariffs in their current form could pose a very significant challenge to its exporters. The ECB expects US tariffs could reduce German GDP by 1% over 2025.
EU inflation has been a supportive / bullish factor to ECB monetary easing with core Eurozone inflation just 2.4% and generally declining. Seven EU countries have inflation below 2%. The good EU performance on inflation could possibly be a pointer for global trends. Bulgaria will join the Eurozone in January 2026 a further positive.
At its 5th June meeting the ECB reduced its benchmark deposit rate by 25 basis points to 2%. The ECB has cut rates 8 times in the last year and a further cut to 1.75% is expected by end 2025. This level leaves room for further easing.
In the context of small rate reductions elsewhere, and big ECB reductions, the ECB might have been expected its monetary policy to weaken the Euro. However, over 2025 the Euro has gained c. 10% v USD suggesting a significant cash outflow from the US to Europe.
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source:www.yahoo.com
On 18th June the Swedish Riksbank lowered rates 0.25% to 2% a level lower than its core inflation expectation of 2.4% in 2025.
On 19th June the Swiss National Bank cut rates 0.25% to 0% to help brake the surging Swiss franc that has benefited from USD flight and gold linkage.
Arguably ‘hold onto your Euros’. Could 2025 see further Euro appreciation? In our view yes.
2025: Bank of England MPC (monetary policy committee)
The Bank of England meeting voted 6/3 in favour of holding Bank Rate at 4.25% with the notes reflecting concern over continued elevated UK pay growth at 5.1% p.a. and a weaker inflation performance vs both the US and EU. Recent events have ramped crude oil prices and shipping rates – both of which are new inflationary factors, also figured in this decision. The Bank expects inflation to remain at current levels over the second half of 2025.
The MPC majority and Governor want a ‘gradual and careful approach’ towards monetary easing whilst also insisting there is no ‘pre-set course’. This approach maintains flexibility and buys time. It has been interpreted as being mid-point in an easing cycle lasting possibly 24 months whose aim is to maintain a mildly restrictive monetary policy.
At the meeting the MPC recognized substantial disinflation in the last two years as previous external shocks have receded, and due to the impact of normalization of UK interest rates over 2022-2023. The MPC is mindful that further shocks could easily emerge and have mentioned this factor.
The ‘Quarter point per Quarter’ pace has not been specifically refuted and this remains the market expectation. Bank Rate will end 2025 at 3.75% according to this market hypothesis.
Sterling’ has broken out of its Brexit range against the USD in 2025. Sterling appreciation would pressure inflation overall if it continued.
2025 US Federal Reserve (US Fed)
The Fed is keeping interest rates at levels commensurate with its short-term outlook where it sees a balance of risks around the inflationary impact of US tariffs. Ahead of the 90 day period end (9th July 2025) the central bank is concerned that US inflationary pressures will increase over the second half of 2025. Its policy is one of keeping monetary policy on hold until clarity emerges on the precise impact of US tariffs, possible retaliatory measures and how this impacts US consumers and businesses. In our view this is entirely wise and appropriate.
Conclusion
Many countries have lowered rates over Q2 2025 both as a stimulus measure to counter slowing GDP rates in key economies and given a highly uncertain international context.
The ECB has been at the forefront of monetary easing which has had the spill over effect in Switzerland, Norway and arguably Japan, which has halted its tightening interest rate cycle.
The Bank of England is proceeding cautiously and wants to keep its monetary powder dry. The Bank is under no pressure to significantly remove the monetary brakes though further reductions are possible over H2 2025. The move could be a half point in total towards the end of 2025.
Overall this is a modestly encouraging backdrop particularly in rate sensitive sectors, such as construction, travel & leisure, property, retail though it could also translate into less enthusiasm for financials.