ECB Cuts on Cue as BoE Split Surprises

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Eurozone Market Update

As expected, the ECB cut interest rates by 25 bps at its early June meeting. It remains on track to lower rates to 2% and markets are pricing a terminal rate between 1.5% and 1.75%. Chief Economist Philip Lane confirmed the ECB’s June forecasts will assess US trade risks, reinforcing the dovish outlook. Governing Council member Pierre Wunsch supported continued easing but warned rates may need to rise again in 2026 if global trade tensions intensify. Tariff uncertainty is already weighing on sentiment, with the composite PMI slipping into contraction at 49.5, led by a sharper-than-expected drop in services, highlighting rising downside risks to growth.

_{Source: Bloomberg, data as of 30 April 2025}

UK Market Update

The BoE cut the Bank Rate by 25 bps to 4.25% in May, but a 2-5-2 MPC split signalled greater internal divergence. Two members voted for a larger cut, while Chief Economist Huw Pill and one other preferred to hold. Pill described his decision as a “tactical pause,” citing stubborn services inflation, which rose to 5.4% in April. His comments triggered a 4 bps intraday rise in 10-year gilt yields as markets reassessed the pace of policy easing. Governor Andrew Bailey reiterated a cautious, data-driven stance, prompting markets to push back expectations for the next cut. The BoE upgraded its 2025 GDP forecast to 1.0% and sees inflation peaking at 3.5% in Q3. Meanwhile, the UK secured a trade deal with the US featuring exemptions on steel and autos. A summit with the EU signalled some closer cooperation but limited integration, with the revised EU deal projected to boost UK GDP by just 0.2% by 2040.

_{Source: Bloomberg, data as of 30 May 2025}

US Market Update

The Fed held rates in May, with Chair Jerome Powell reaffirming a cautious, data-dependent stance amid elevated uncertainty. Market futures continue to price in four cuts over the next 12 months, compared to the Fed’s projection of two to three. We expect two, with a third possible if downside risks emerge. Legal challenges to the “Liberation Day” tariffs added to trade uncertainty; a federal court ruled the measures exceeded presidential authority, but an appeals court temporarily reinstated them. A US-UK deal secured exemptions for key US exports, including steel and aviation. Meanwhile, Moody’s downgraded the US to Aa1, becoming the final agency to strip the country of its AAA rating, citing rising debt and interest costs. The market reaction was muted, unlike S&P’s 2011 downgrade, reflecting continued confidence in US Treasuries’ 'safe-haven’ status.

_{Source: Bloomberg, data as of 30 May 2025}

Looking Ahead

Tariff uncertainty, in light of recent US court rulings and broader policy noise surrounding the “One Big Beautiful Bill Act,” is compounding an already fragile macroeconomic backdrop. We expect incoming data to remain mixed, with tariff effects likely to emerge in hard data later than anticipated, which will limit visibility for central banks. The Fed and BoE are both expected to hold steady in the coming months. We expect the Fed to remain cautious and sidelined through year-end, while the BoE remains focused on services inflation and wage growth, with its next cut still likely in August, followed by quarterly easing. By contrast, the ECB cut again in early June and is proceeding toward a 1.75% terminal rate, with risks skewed lower. Against this backdrop, money market funds remain well-supported by heightened policy uncertainty and the ongoing appeal of high-quality, liquid instruments.

Chart of the Month

_{Source: Bloomberg as of 6 June 2025}

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