Market Commentary 22nd September 2025 – from Matt Taylor

The Bank of England held its interest rate steady at 4% last week, with a 7–2 vote reflecting a cautious, data-driven approach amid persistent inflation and subdued economic growth. Policymakers highlighted progress in disinflation but noted that inflation remains above target, with CPI at 3.8% in August. Headline inflation is expected to rise slightly before trending lower. The committee also slowed the pace of quantitative tightening, reducing gilt holdings by £70 billion over the next year, compared to a reduction of £100 billion this year. While wage growth has eased, the Bank signalled no pre-set path for rate cuts, emphasising flexibility in response to evolving economic conditions.

UK labour market data for the three months to July 2025 showed the unemployment rate steady at 4.7%, its highest since late 2021. Despite this, employment reached a record 34.2 million, driven by full-time job gains and a rise in workers holding second jobs, reflecting ongoing cost-of-living pressures. Wage growth slowed, with regular pay rising 4.8% year-on-year, the weakest since May 2022, while both public and private sector pay increases moderated. Retail sales volumes surprised to the upside, but consumer confidence slipped further on concerns over looming tax hikes, suggesting that households remain cautious despite resilient spending.

In Germany, wholesale prices accelerated for a ninth consecutive month in August, rising 0.7% year-on-year, driven by sharp increases in food and beverage categories. However, producer prices fell by 2.2% annually, the steepest drop since May 2024, mainly due to lower energy costs. While the ZEW Economic Sentiment Index improved in September, signalling cautious optimism for export-oriented sectors, the current conditions gauge deteriorated further, highlighting ongoing economic challenges and persistent uncertainty.

In France, the manufacturing climate indicator slipped in September, reflecting weaker past production and softer order books, with sentiment remaining below the long-term average. The broader business climate remained unchanged for the fourth consecutive month, as improvements in services and wholesale trade were offset by continued weakness in industry and retail. Despite some sectoral rebounds, overall business sentiment remains subdued, underscoring the fragile recovery across the French economy.

The Federal Reserve delivered its first interest rate cut since December, lowering the rate by 25 basis points to 4.00% last week. The move, which was widely anticipated, reflects the Fed’s effort to balance persistent inflation pressures with signs of a cooling labour market and housing sector. Policymakers signalled a gradual approach to further easing, projecting two more cuts by the end of 2025 as they updated their economic forecasts.

US economic data presented a mixed picture. Retail sales surprised to the upside in August, rising 0.6% month-on-month and 5% year-on-year, with broad-based gains across categories such as non-store retailers, clothing, and food services. Manufacturing output slowed, while export prices saw their biggest yearly increase since 2022, pointing to continued cost pressures in global trade.

Meanwhile, the housing market weakened again, with the number of new residential construction projects falling to one of their lowest levels in over five years, as a large supply of unsold new homes and a slowing job market continued to weigh on demand. However, initial jobless claims dropped sharply, easing fears of a worsening job market and supporting the Fed’s decision to begin cutting rates cautiously.

China’s latest data pointed to a loss of momentum across key sectors in August. Industrial production growth slowed to 5.2% year-on-year, the weakest pace in a year, as manufacturing activity and utilities output both slowed amid subdued domestic demand. Retail sales growth also decelerated for a third straight month, while the surveyed unemployment rate edged up to its highest level since February, highlighting ongoing labour market pressures. Meanwhile, new home prices continued to fall, though the pace of decline eased as authorities maintained support for the property sector.

In Japan, the trade deficit narrowed sharply in August, driven by a significant drop in imports to a six-month low, reflecting weak domestic demand and high input costs. Exports remained resilient, declining only marginally despite global headwinds. Inflation eased to 2.7%, its lowest since October 2024, as government subsidies helped curb energy prices, though food inflation remained elevated. The Bank of Japan kept its policy rate unchanged at 0.5% and signalled further steps toward policy normalisation, including plans to gradually reduce Exchange Traded Fund (ETF) and Real Estate Investment Trust (REIT) holdings, while noting a moderate recovery and persistent inflationary pressures in Japan’s economy.

GBP / EUR – Current 1.1470 Previous 1.1558

The Pound weakened against both the Dollar (-0.62%) and the Euro (-0.76%) over the past week. While the Federal Reserve cut interest rates and signalled further easing, the Bank of England held rates steady at 4.0% and indicated no further cuts this year. Currency investors seemed to react unfavourably to the Bank of England’s decision to keep rates unchanged.