Newsroom

09 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Divided MPC stick to gradual interest rate cuts

• As expected, the Bank of England delivered another cut in interest rates, lowering Bank Rate to 4.25%. However, the contrast in views between Committee members was surprising, highlighting the lack of certainty on the direction of travel for the UK economy.
• While the Monetary Policy Committee (MPC) did not take a June cut off the table, there was no clear sign that it intends to break from its current pace of one interest rate cut per quarter. However, its projections indicate that it does still intend to lower interest rates further as it balances the dilemma of weak growth and sticky inflation.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “While it was no surprise that the Bank of England delivered its fourth 25bps cut in interest rates today, lowering Bank Rate to 4.25%, there was an unusual level of disagreement amongst the MPC. The unusually wide divisions appeared as two of the most dovish rate setters voted for a larger 50bps cut based on concerns around the growth outlook, while two hawkish MPC members favoured no change, with inflation persistence remaining a concern. 

 “The MPC stopped short of giving any clear guidance on what it will do at its next meeting. However, while it didn’t close the door on a June rate cut, it appears likely that the MPC will continue with its established pace of one cut per quarter. Recent tariff developments may have pushed the MPC to deliver a cut at this meeting that it may not have done otherwise. But the Committee continues to stand by its intention to lower rates ‘gradually’ and ‘carefully’, keeping them restrictive for some time yet. 

 “In what is a difficult message to land, while the MPC may not intend to speed up the pace of rate cuts, it does expect to continue to lower Bank Rate further as it balances weak growth prospects and sticky inflation. Its updated projections indicate that as interest rates fall back towards 3.5%, inflation will return to its 2% target. However, given the uncertainty around the economic outlook, the Committee will likely continue to tread carefully as it monitors how interest rate cuts and the wider economy play out. We still expect the next interest rate cut to come at the Bank of England’s August meeting.”

08 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

House prices ticked up in April, but activity data still signals a possible soft patch

• Having fallen in February and March, the Halifax house price gauge rose in April. House price data can be volatile from month-to-month and over the last three months, house prices nudged down as the change in Stamp Duty at the end of March approached and passed. 
• With some house purchases rushed through to beat the change in Stamp Duty, it is likely that the housing market is entering a brief soft patch. In the latter half of the year, the housing market will likely see subdued growth as, despite falling interest rates, affordability is stretched and uncertainty around the economic outlook lingers. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Despite the change in Stamp Duty thresholds at the end of March, house prices rose in April, growing by 0.3% on the back of a -0.5% fall in March according to Halifax. However, housing market data can be volatile from month-to-month and looking over the last three months, house prices fell by 0.1% as the market normalised in the run up to the Stamp Duty deadline. Looking past some of the recent noise, over the second half of last year the housing market kicked into gear as interest rates started to fall, leaving house prices 3.2% higher than 12 months ago and, at an average of £297,781, still close to record highs.

“With some house purchases having been accelerated to beat the change in Stamp Duty thresholds at the end of March, the housing market is now likely to enter a temporary soft patch. Mortgage approvals gradually fell through Q1 as the deadline approached and it looks like the slowdown has further to run into Q2. When Stamp Duty thresholds changed in 2021, the deadline prompted a significant slowdown in activity. However, this should be cushioned slightly by lower mortgage rates as financial markets are now expecting more interest rate cuts than they had been before global tariff announcements in March.

“Further cuts to interest rates should help prop up demand to an extent later in the year, but affordability challenges remain, and with some potential buyers possibly postponing house purchase decisions until the economic outlook appears less uncertain, we expect growth in prices and activity to be relatively subdued.” 

06 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Tariff announcements affect sentiment in the services sector

• April's final UK services Purchasing Managers’ Index (PMI) pointed to a slight fall in activity. This likely reflects weaker sentiment in response to US tariff announcements, rather than a genuine decline in services output. However, GDP growth will likely slow in Q2, as the initial effects of tariffs start to be felt.
• The services survey also reported a significant rise in output price inflation, as businesses continued to pass on the impact of higher labour costs. But the Monetary Policy Committee (MPC) will almost certainly cut Bank Rate later this week and could even signal a more proactive approach to loosening policy at subsequent meetings.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “April's final S&P Global survey signalled a modest contraction in services activity, with the PMI falling to a 27-month low of 49.0, from 52.5 in March. Alongside the lower PMI, survey respondents also noted a decline in new orders amid reports of customers delaying spending decisions due to uncertainty stemming from global trade disruption. Though April's manufacturing survey reported a slightly smaller decline in output than in March, the weaker services outturn meant the composite PMI fell to 48.5, down from 51.5 a month earlier.

 “The S&P Global survey typically does a better job at capturing fluctuations in business confidence than actual changes in private sector activity, and we expect April's survey will prove a case in point. It's difficult to reconcile last month's US tariff announcements and the well-trailed increase in employers' National Insurance Contributions (NICs) with a sudden and outright contraction in services activity. Nonetheless, GDP growth is likely to be slower in the second quarter as the initial effects of tariffs start to be felt.

 “The services survey also reported a significant rise in output price inflation in April, as businesses sought to pass on the impact of higher labour costs. However, a 25bps rate cut at this week’s MPC meeting remains almost certain. Early signs suggest the MPC may be open to adopting a more proactive approach to loosening at subsequent meetings, but the minutes and press conference will provide a better sense of whether that's a realistic possibility.”

01 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Difficult outlook for the manufacturing sector

• The April S&P Global Manufacturing Purchasing Managers’ Index (PMI) points to a further fall in UK activity on the back of recent US tariff announcements. While the PMI's tendency to respond to shifts in sentiment rather than activity may be overstating the weakness, reduced access to a key export market, a softer world economy and domestic uncertainty present the sector with a challenging economic outlook.The manufacturing sector faces continued cost pres
• sures as businesses respond to the increase in the National Living Wage and employers' National Insurance Contributions (NICs) by raising prices and cutting jobs. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The April S&P Global manufacturing survey recorded a PMI of 45.4 in April, suggesting that while activity continued to slow quite significantly, the sector performed a little better than in March when the headline balance was 44.9. Global trade disruption and uncertainty has clearly weighed on the sector, with survey respondents reporting a marked fall in demand from key export markets.

“In recent years, the PMI has proved to be a poor guide to official activity estimates as it can be overly influenced by shifts in business sentiment. Although the extent of recent weakness in the PMI should be taken with a pinch of salt, US tariff announcements nonetheless present a challenging outlook for the manufacturing sector. Reduced access to a key international market and a weaker world economy will hinder exports, while lingering uncertainty points to a period of more subdued domestic demand. 

“Increases to the National Living Wage and NICs have seen businesses’ input costs rise. The survey suggests companies are responding by reducing headcount and increasing prices quite significantly, posing a dilemma for the Bank of England, which will likely look to balance the pace of interest rate cuts with evidence that inflationary pressure is easing. That said, we do think that another cut in interest rates next week appears almost certain.”

01 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Stamp duty changes dominate mortgage data

• The changes to stamp duty thresholds at the end of March had a major impact on that month's lending data, with net lending increasing significantly but approvals continuing to cool. Past experience from similar stamp duty changes suggests activity is likely to remain soft over the next couple of months, before gradually picking up once the policy-induced volatility ceases.
• Net unsecured lending edged down in March, with higher repayments more than offsetting a small rise in gross lending. Improvements in credit demand and consumer spending growth remain modest, but with real incomes still rising, we think this should support slightly stronger consumer spending growth this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The change to stamp duty thresholds at the end of March was the key influence on the month's mortgage data. Net secured lending rose significantly to £13bn in March, from £3.3bn in February, as borrowers completed purchases to beat the deadline and benefit from lower transaction costs. By contrast, mortgage approvals fell modestly for the third consecutive month in March, to 64,309, from 65,093 in February.

“Given the experience of a similar stamp duty change in 2021 prompted large falls in approvals after the deadline, the recent cooling in mortgage activity likely has further to run in the near-term. However, this should be partially offset by the impact of lower mortgage rates, with swap rates having fallen substantially in response to US tariff announcements. Further ahead, growth in activity and prices in the second half of 2025 will likely be relatively subdued given affordability remains stretched by historic standards on all metrics.

“Net unsecured lending fell to £0.9bn in March, from £1.3bn in February. Gross lending edged up, but this was more than offset by a rise in repayments. Households still face considerable headwinds from tighter fiscal policy and the lagged impact of past interest rate rises. But with real incomes still set to rise this year, albeit more slowly than in 2024, consumer spending should still grow modestly.”

01 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Bank of England Preview: A difficult needle to thread

• A 25bps cut in Bank Rate to 4.25% appears almost certain.
• Since April’s tariff announcement, some MPC members have indicated that tariffs pose a risk to the growth outlook, without outlining what it means for the future path of interest rates. 
• The lack of clarity around the pace of potential future rate cuts poses a communication challenge to the MPC. It will likely want to show it will consider faster rate cuts if the economy slows significantly, but any overt promises of another cut in June are unlikely.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The recent announcements on US tariffs have shifted the focus from May’s interest rate decision, which is now seen as sewn up, to what the Bank of England says about the future path of interest rates. The MPC appears likely to favour a 25bps cut, but there’s a possibility that the likely impact on growth of recent tariff announcements could see one of the more dovish MPC members push for a 50bps reduction in Bank Rate to 4%.

Some downward pressure on inflation, but extent is unclear 

“Since it started cutting rates last August, the MPC has given little indication as to how far or how quickly it expects to reduce interest rates, which is unlikely to change given the added uncertainty caused by recent tariff announcements. 

“The MPC is unlikely to want to declare victory over sticky inflation yet. Sterling’s appreciation and the lower oil and gas prices seen in recent weeks will probably lead to a lowering of the Committee’s 12-month inflation forecast. But its preferred gauge of underlying price pressures (services excluding volatile and indexed components) has stopped falling in recent months and pay growth remains above the rates consistent with inflation at 2%. 

“The MPC is also still yet to fully observe how April’s changes in employer National Insurance Contributions (NICs) and the National Living Wage will ripple through the labour market, wages, and prices. How this plays out will be an important input into interest rate decisions over the coming months.” 

Communications a key challenge for the MPC

“Some Committee members have already outlined that tariffs pose a risk to growth, but at first glance this may be difficult to square with its new GDP projection. The Bank of England’s February forecast of 0.7% growth in 2025 was already pessimistic, and after an initial strong to start to this year, the forecast for 2025 could remain unchanged or even edge a little higher. 

“To balance its concerns around the growth outlook and the stickiness of inflation, the MPC may need to solve a communications challenge. It hinted in March that it would present some updated scenarios around its forecast, and we think that this could be part of a wider communications revamp that would see the MPC move on from guidance that interest rate cuts will be ‘gradual’ and ‘careful’. However, with financial markets now expecting more cuts than they were three months ago, we think the MPC will want to try and strike a difficult balance. With little clarity on the outlook, the MPC will likely want to show that on one hand it remains wary of sticky inflation, but on the other it stands ready to respond if the growth outlook deteriorates sharply.”

25 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Retail’s strong start to 2025 may not last

• The first quarter saw the UK retail sector make a strong start to 2025. However, the data probably overstates the sector's performance as the Office for National Statistics (ONS) continues to miss how changing seasonal spending patterns are impacting its retail sales estimates.
• It looks like 2025 will be another year of modest growth in consumer spending. Real wage growth seems set to slow, while global economic uncertainty will likely lead to heightened consumer caution. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Retail sales continued their strong first quarter by growing by 0.4% in March, having risen by a downwardly revised 0.7% in February to leave growth at 1.6% across Q1. The ONS reported that sales in March were boosted by the good weather at the start of Spring as clothing retailers reported a particularly strong month, with sales growing 3.7% in March. But most other parts of the non-food sector also continued to report decent growth across the month. 

“It appears likely that the data is overstating the performance of the retail sector in the first quarter. Nearly all the growth over the last year can be accounted for by the performance in the last three months, with retail sales in Q1 only 1.7% above a year earlier. Continued issues with residual seasonality mean that official activity estimates are likely too strong in the opening six months of the year, which are then offset by overly pessimistic readings in the second half of the year. 

“Looking past what was likely an overly optimistic start to the year, 2025 appears that it will be another year of modest performance in the retail sector. Rising inflation and slowing earnings growth are expected to impede the speed at which real wages rise. While consumer confidence consolidated through last year, recent US tariffs announcements look to have hindered sentiment. If this global economic uncertainty continues, consumers could hit pause on some spending decisions.”

23 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

April’s flash PMIs fall amid elevated trade uncertainty

• The UK flash composite Purchasing Managers’ Index (PMI) fell significantly in April to a 29-month low. Swings in business sentiment rather than genuine changes in activity can often drive the survey's outturns, and we think recent US tariff announcements played an outsized role in today's data. But while we doubt that activity is genuinely contracting, we expect the pace of GDP growth to underwhelm.
• We think a May rate cut from the Monetary Policy Committee (MPC) is almost certain. With today's survey suggesting that businesses are reflecting higher labour costs in prices, and significant uncertainty around how heavily tariff increases will weigh on growth and inflation, the MPC is likely to stick to its cautious approach to loosening policy for the time being.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “April's flash S&P Global survey reported a decrease in the composite PMI to 48.2, from 51.5 in March. The fall was largely driven by the services balance declining to 48.9 from 52.5. Respondents linked this to rising global uncertainty and subdued domestic demand. Meanwhile, the decline in manufacturing production gathered pace following March's disappointing outturn. The sector's PMI also weakened, falling to a 20-month low of 44.0 in April, from 44.9 a month earlier.

“The composite PMI is a relatively poor leading indicator of GDP growth, particularly during periods that exhibit significant swings in business sentiment. April saw a flurry of tariff announcements by the US government and the increase in employers' National Insurance Contributions (NICs) coming into effect, and we think the fall in the PMIs is heavily driven by sentiment. Nevertheless, while we doubt that activity is genuinely contracting, we still expect GDP growth to underwhelm this year, with higher tariffs adding to the considerable headwinds already facing the UK economy.

“Elsewhere in April's flash survey, respondents reported that higher labour costs pushed up input cost inflation, and businesses reflected this in output prices. A 25bps rate cut at May's MPC meeting is almost certain, so the key question is where rates go from there. We expect the Bank of England to continue to adjust interest rates carefully for now as it monitors how tariffs, changes to employers’ NICs and the rise in the National Living Wage ripple through to the wider economy, but the impact of tariffs on growth could increase the chances of a faster rate of cuts.”