August 2025 Review

Inflation Up – Base Rates Down

Not the usual relationship between price inflation and monetary policy changes, but the Bank of England lowered bank/base rates by 0.25% in August despite UK inflation, as measured by the Consumer Price Index (CPI), rising in the previous month. That might explain why the nine members of the Bank of England’s Monetary Policy Committee were divided over the decision to lower the rate. The chart below shows the increase in both goods and services inflation in recent months.

Source: Marquee Finance by Sagar

• Bond markets have taken on board either the prospect of fiscal expansion in the US (more borrowing) or appeasing rebels in the governing UK Labour Party by not going through with unpopular plans to cut spending. In July, this was reflected in longer maturity bonds (10 year maturities and longer) rising in yield therefore, falling in price. The prospect of lower official interest rates helped shorter maturity bonds be more stable. In Japan, longer maturity bond yield rose sharply.
• The US Dollar had a better month against most currencies including Sterling. It would seem that traders were collectively betting that the US currency would fall further and were susceptible to a reversal in the USD Dollar’s fortunes causing a rebound in its value. Against Sterling, the US Dollar rose 3% in July.

The Bank of England is probably concerned about a rise in the UK unemployment rate over the past year,

Lower short-term interest rates did not help longer-dated bond yields as the UK 30 year Gilt yield rose above 5.6% and is appreciably higher than when Liz Truss was briefly in power.  The reason for this is the lack of progress on reducing Government borrowing in the UK.

Nor is this just a UK phenomenon.  Questions abound in the US about how the Trump administration will fund its budget deficit.  The US Federal Reserve, the body responsible for setting US official short-term interest rates, is widely expected to lower its official rate at its next meeting on September 17^th despite inflation remaining well above the 2% target level.  Like the UK, unemployment is rising in the US and the Federal Reserve is mandated to pursue maximum sustainable employment (unlike the Bank of England).  US bond yields with maturities of ten years and longer have crept up (prices lower) in the face of lower official short term rates.

Yet despite the above and much negotiating in the geopolitical arena with US President Donald Trump to the fore, August was a relatively less volatile month than its predecessors in 2025.  Equity markets, often sensitive to rising bond yields were unfazed by them, delivering another positive month since the tariff turmoil of early April.

• Japanese equities led market returns in August, up over 4.5%, despite being one of the more volatile equity markets due to inflation concerns and policy responses or lack of them.
• US central bank (Federal Reserve/Fed) independence was further diluted by President’s Trump’s firing of Lisa Cook, a Fed Governor; the first time in history a US President has fired a Fed Governor. This added to the declining confidence in the US Dollar which weakened against Sterling over the month.
• Yet equities were unbowed with indices rising over the month, although large tech company share prices fell towards month-end despite impressive earnings from Nvidia, whose share price fell over 4% after its quarterly earnings announcement on August 27^th.