25 September 2025: The Bank Governor hints at interest rate cuts if/when inflation cools

Bank of England Monetary Policy Committee Member Megan Greene makes relatively few public statements, so when she does, her comments tend to grab the attention of the financial market.

Greene is an external member of the committee. This means she does not have to toe the line, following policy guidelines, which allows her comments to be based on her intellect and judgment.

Her statements differ from those of other external members, such as Swati Dhingra and Catherine Mann, in that she is willing to be swayed by the current situation, meaning that her vote is driven not by a confirmed attitude, but by a 360-degree view of the situation as it presents itself at the time.

She spoke yesterday in Glasgow, explaining her opinion that the pace of the fall in inflation is slowing, which may lead the Bank to adjust the pace of any future rate cuts.

UK inflation remains an outlier among developed nations, with headline CPI running above target for over four years and rising again over the past year.

She noted that disinflation has been concentrated in rate-sensitive sectors, suggesting “the bulk of disinflation may have already come through”, while labour market slack has emerged.

Greene argued that the data bear the “hallmark of an adverse supply shock,” but said second-round wage effects are unlikely to pose significant risks as the labour market loosens. She added that while risks from trade persist, they have eased somewhat, and GDP growth is expected to rebound without a sharp deterioration in jobs.

She emphasized two key lessons from the recent supply shock. When inflation persistence is uncertain, policymakers should prioritize addressing inflation to prevent it from becoming entrenched, and prices may respond more quickly than output when inflation is elevated.

Against that backdrop, she said “an appropriate response to the uncertainty and risks we are currently facing should involve a cautious approach to rate cuts going forward”, reinforcing her vote last week to keep Bank Rate at 4%.

The Bank’s Chief Economist, Huw Pill, spoke earlier in the week about the dialling back of quantitative tightening, and how it would provide only temporary relief from recent turbulence in gilt markets, and argued that other tools were better suited to addressing rising borrowing costs.

While there were “legitimate concerns” about government bond market conditions, “I am not convinced that these changes are either being driven by QT or that QT should address their implications”, said Pill.

There are valid concerns about the state of government bond markets, including rising interest rates and market instability. However, Pill is sceptical that the problems in the bond market are caused primarily by quantitative tightening, which occurs when a central bank reduces the money supply by selling bonds.

The Bank’s Governor also spoke yesterday and hinted that the path to lower interest rates will be strewn with unfulfilled hopes, as inflation remains a key concern. He said ‘cautious’ consumers were holding back on spending as he hinted at further interest rate cuts, sending the pound lower against the dollar.

Sterling fell by as much as a cent against the dollar to just above 1.34 versus the dollar, a three-week low.

Fed Chairman Jerome Powell continues to display a pragmatic approach to monetary policy, despite the often-overbearing criticisms of President Trump and the continued “infiltration” of the FOMC by Trump appointees.

Although the recent numbers point to a resilient economy, commentary from Fed officials has injected some wariness, especially about the labour market, prompting investors to tread carefully.

Powell sounded a cautious note on Tuesday when he said asset prices appeared relatively highly valued.

Even as his colleagues staked out arguments on both sides of the policy divide, the Fed chair emphasized the tightrope the central bank must walk in upcoming interest-rate decisions as it navigates inflation risks, while addressing signs of a softening labour market.

The market was somewhat caught off guard by Powell’s stock market valuation comments and took that as a signal that perhaps the Fed could be concerned about elevated asset prices.

FOMC member and San Francisco Fed President Mary Daly noted yesterday that although she supports rate cuts, there is only so much that lowering interest rates to neutral can accomplish in terms of stability.

She went on to say that further policy adjustments will likely be needed as the Fed works to restore price stability and provide the necessary support to the labour market.

The labour market has slowed, and inflation has risen less than expected.

Risks to the economy have shifted; it may be time to act. The Fed's rate-path projections are not promises; we will need to assess tradeoffs at each decision point. This makes it hard to say if further rate cuts will come now, later this year, or when, since the labour market is not intrinsically weak.

Following his speech, which was taken as a dressing down of the UN, President Trump returned to trying to solve the continuing saga of the war in Ukraine. The President either cannot make up his mind about which side to support, often criticizing the Ukrainian President for his demands, then saying yesterday that there is no reason that Ukraine should accept the land grabs by Russia that have been happening so far this year.

In a post on his Truth Social platform, Trump said the Russian army was a “paper tiger” and that Kyiv should act now to win back all the land captured since the beginning of the invasion in February 2022.

It is also doubtful that the President has finished attacking the independence of the Federal Reserve. The case against FOMC member Lisa Cook is ongoing, while Trump is expected to announce his choice to replace Jerome Powell in the coming weeks.

The dollar index rallied yesterday as the overall balance of comments and data still points to a Fed that will be cautious about cutting rates.

It climbed to a high of 97.92 and closed at 97.87.

Chancellor Friedrich Merz is still struggling to make his point to the German people about the changes that are needed to breathe life into the country’s economy.

Speaking in the Bundestag yesterday, he told its members Germany must confront major reforms to return the sputtering economy to growth or risk social fracture, while defending record spending plans in a speech to parliament on Wednesday.

Merz, once a budget hawk devoted to balanced budgets, has moved to borrow hundreds of billions over the coming decade to pour into infrastructure projects, overhaul the energy grid, and rebuild Germany’s long-neglected armed forces.

“We have a lot to do to get our economy back on track,” he said, adding that the first step was to start “eliminating the investment backlog that has built up over more than a decade.”

The €520 billion budget proposal for 2026 sets aside €126.7 billion for investment to jolt the EU’s largest economy out of more than two years of stagnation.

Climate goals and the transition to renewable energy must be balanced against the needs of industry, Merz, a Christian Democrat, said to jeers from the Greens. During the election campaign, Merz vowed to build more new gas-fired power plants, and faced criticism for allegedly undermining climate efforts.

“Nothing could be further from the truth,” Merz countered on Wednesday. He accused the Greens, who led key ministries in the previous government, of following dogmatic climate “ideology” that dragged down industry, and threatened economic prosperity.

“Climate policy that jeopardizes or even destroys the industrial base of our country, that puts our country’s prosperity in jeopardy – that will not be accepted by the population,” Merz said.

European Central Bank Executive Board member Piero Cipollone said that the Central Bank doesn’t see major threats to inflation in either direction, adding that interest rates are currently well-positioned.

He went on, “We are doing pretty well. We expect growth to be in a good place in the coming years, on sound fundamentals and a resilient labour market. However, uncertainty is still there, while risks to inflation are very balanced.”

We expect to be close to target for the next two years, since inflation expectations are well anchored.

The euro suffered a “down day” following Jerome Powell’s comments. It fell to a low of 1.728 and closed at 1.1737. There are many sell orders placed above 1.18, which will have to be cleared if the single currency is to make an assault on the 1.20 level.

Have a great day!