US and UK rate decisions: no changes, but global uncertainty on the rise

Shuffling the deckchairs on the Titanic is the thought that springs to mind! The Federal Reserve (Fed) kept rates unchanged at 4.25% to 4.50% in their latest meeting on 19 March and kept their rate forecasts unchanged, which was a surprise despite some significant growth risks building up for the US and wider global economy.

Federal Reserve

The decision was widely expected by the market and the focus was on the Summary Economic Projections (SEP), the Federal Open Market Committee (FOMC) members interest rate projections, and what rhetoric would accompany the decision. The SEP highlighted that the committee was concerned about tariffs pushing up inflation, but the impact could result in a potentially lower growth profile. However, chairman Jerome Powell was quick to point out that this inflationary impulse was expected be transitory in those forecasts. He also suggested not reading too much into some of the recent inflation data. The interest rate projections (dot forecasts) were shuffled around by some members of the committee in the short term, but the end result is that the Fed still expects two interest rate cuts in 2025 and a further two cuts in 2026. The longer-term view was also broadly unchanged.

There was an underlying theme of uncertainty and perhaps a suggestion that the Fed is likely to proceed with caution from here. That could well risk them getting behind the curve if President Trump’s policies quickly become more detrimental to US growth. As a result of these fears, the treasury market rallied, led by the short end as the yield curve steepened. In addition, US breakeven rates (the difference between Treasuries and Inflation linked Treasuries) widened, shrugging off the “transitory” view of the chairman. The committee also voted to reduce the pace of passive Quantitative Tightening from $25bn/month to $5bn/month from the start of April 2025 and this at the margin helped to boost the dovish tone.

So we are firmly in a wait and see mode, with all eyes on the next set of Trump executive orders. The problem with looking in the rear-view mirror though is that you are unlikely to see the oncoming iceberg!

Bank of England

At the latest meeting on Thursday, the Bank of England (BoE) held UK interest rates unchanged at 4.50%, by a majority of 8-1. Unlike in February 2025 where two Monetary Policy Committee (MPC) committee members voted for an immediate reduction in rates by a full 0.50%, this time round it was just a single member who dissented to reduce rates, and that too by a lesser size of 0.25%. With the US Federal Reserve meeting the day before on 19 March, and the UK Government’s Spring Statement to come next Wednesday on 26 March, the BoE meeting was ultimately a non-event for markets. With this being a non-Monetary Policy Report month, there was little expectation for any change in interest rates, or any updates on economic forecasts for the market to analyse.

Although little has changed on the domestic front, internationally the picture is changing and creating uncertainty.

The decision to hold rates steady reflects the BoE’s careful approach to monetary policy in the face of global uncertainty and mixed economic data. While economic growth remains sluggish at best–and forward-looking survey indicators for labour demand and wages continue to moderate–some of the hard data is holding in better than expected. Inflation persistence also remains a concern for the committee, with the MPC expecting inflation to rise further from here to around 3.70% in the third quarter of this year, before gradually declining below 3.0% early in 2026. Although little has changed on the domestic front, internationally the picture is changing and creating uncertainty. US foreign trade policy is central to this, as is the recent decision by Germany to increase fiscal spending.

The biggest upcoming risk event for the UK bond markets is likely to come at next Wednesday’s Spring Statement. Given the weak economic growth picture, and the rise in gilt yields since November 2024, the Chancellor is under pressure to steady the ship and allay market fears around debt sustainability. How financial markets react will depend on just how credible any policy adjustments are, as well as how the UK Debt Management office plans to finance what is expected to be over £300bn of borrowing for fiscal year 2025/2026. The real fear is that policy action to tackle the current mix of low growth, high public spending, and an ever-growing borrowing requirement, will be delayed until later in the year. A lack of serious action on this could create increased uncertainty for investors at a time of heightened global risks. Gilts look attractive, particular in shorter maturity nominal bonds, and longer dated index linked bonds. But there are significant risks ahead, and 26 March might just be the first real test of investor sentiment on gilts since early January.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.