8 August 2025

Jonathan Sparks

Chief Investment Officer, UK, HSBC Private Bank and Premier Wealth

In a rare and closely divided 5-4 vote, the Bank of England’s Monetary Policy Committee (MPC) opted for a 25bps cut, taking the Bank Rate down from 4.25% to 4%. The re-vote, triggered by an internal deadlock, underscores the degree of uncertainty surrounding the UK’s economic outlook. While this move marks the lowest rate level in over two years, it also reflects the ongoing tug-of-war between persistent inflation and sluggish growth.

Governor Andrew Bailey described the situation as one of “genuine uncertainty,” with policymakers balancing persistent inflation, now expected to peak around 4% in September, against a backdrop of softening labour market conditions. Gilt yields climbed and GBP firmed on the back of the decision, as markets recalibrated their expectations.

Crucially, the decision comes at a time when “second-round effects” remain a concern. Inflation in services is still elevated, and both households and businesses are grappling with high cost expectations. The BoE remains cautious about easing too quickly, fearing a rebound in price pressures. Yet, it also acknowledges that rates are likely to move closer to 3% over the next year as disinflation becomes more entrenched and growth risks dominate.

From a market standpoint, we maintains a mild overweight stance on UK gilts. Despite volatility, gilts offer relatively attractive value globally, especially as yields are forecast to decline into 2026. With policy rates no longer restrictive, gilts with 7–10-year duration are seen as a compelling investment.

The macroeconomic backdrop remains challenging. UK GDP contracted 0.1% in May, marking the second straight monthly decline. Consumer confidence, as measured by GfK, fell to -19 well below the long-term average reflecting anxiety over persistent inflation, rising tax burdens, and economic policy uncertainty. The housing sector has not been spared either as housebuilding starts is at multi-year lows, and job vacancies which is seen as a forward indicator for wage growth are dropping fast.

Importantly, household savings are rising again, with the saving ratio reaching levels last seen during Brexit uncertainty. This suggests households are bracing for further economic strain. Consumers are holding back on spending, and with consumption accounting for about 60% of UK GDP, this spells trouble for growth in the near term.

Source: Bloomberg, HSBC Private Bank as of 07^th August 2025.

Investor sentiment towards UK equities remains muted. The FTSE 250 equity risk premium has compressed, suggesting UK stocks no longer offer compelling risk-adjusted returns. Meanwhile, uncertainty captured by the UK Economic Policy Uncertainty Index has surged, surpassing levels seen in past political and economic flashpoints.

Source: Bloomberg, HSBC Private Bank as of 07^th August 2025.

Source: Bloomberg, HSBC Private Bank as of 07^th August 2025.

The fixed income market is now pricing in a further fall in the base rate to 3.5% by 2026. However, the market might be overestimating the permanence of recent inflation trends. We think that past evidence of wage moderation and productivity growth suggests inflation may ease more than expected, supporting further BoE rate cuts. The implication? UK bond yields could still fall from here, making long-duration gilts a smart play for income-seeking investors.