Traders unanimously predict that the Bank of England will cut rates at its Monetary Policy Committee meeting on May 8.
But as markets continue to absorb the unfolding effects of the Trump administration’s program of tariffs and rumored trade deals, they also predict a further three rate cuts by the Bank in June, August, and November.
“Homebuilders and utility stocks will be outsize beneficiaries of falling interest rates,” says Michael Field, chief European market strategist at Morningstar.
“For the former, lower borrowing costs should stimulate demand from buyers. For utilities, it’s a double whammy of lower debt interest payments, while their share prices could also attract the attention of dividend-hungry investors, with dividends suddenly looking even more attractive compared with bonds.
“Down the line, consumer sectors should also get a boost, as lower mortgage payments filter down to consumers’ wallets. This in turn should drive spending, particularly in discretionary areas like travel and leisure.”
How Likely Is an Interest-Rate Cut in May?
According to interest-rate swaps data, there is a 107.8% chance of a rate cut next month, with the likelihood of cuts in June, August, and November pegged at 51.5%, 78.3%, and 53.9%, respectively. A cut in September is currently considered 42.5% likely.
Nevertheless, the trading outlook marks a dramatic shift in sentiment from that visible in January 2025’s data, when markets were pricing in just one cut in February. The bank did eventually cut rates that month to 4.5%. In March, it held firm.
The outlook also puts trading data out of step with organizations like the International Monetary Fund, which recently predicted there will now be three cuts in 2025.
The predictions come amid revised—and more pessimistic—growth expectations for the UK economy in 2025, and amid criticism from US President Donald Trump that the US Federal Reserve should be cutting its own rates more quickly.
Speaking in Washington in April, Bank of England Governor Andrew Bailey confirmed that more rate cuts are now likely.
Why Are Central Banks Under Pressure to Cut Rates?
The latest data from the Office for National Statistics shows that inflation is still above target in the UK, at 2.6% for the 12 months to March. This means prices are still rising faster than the Bank of England’s 2% target.
In this environment, central banks might normally be expected to keep a lid on inflation by holding or even raising rates. But there is a bigger concern in the mix: a global recession.
The past month has witnessed significant market volatility because of tariffs imposed by the US government. Projections for economic growth have been driven sharply downward as a result, and fears of a US recession have returned.
In the UK, the Office for Budget Responsibility halved its gross domestic product projections for 2025 to 1.0% at the recent Spring Statement. The IMF predicts a more optimistic 1.1% (from 1.6%), though this would place economic growth behind Canada (1.4%) and the US (1.8%).
And the European Central Bank, which cut rates two weeks ago, did so citing a deteriorating economic outlook for the eurozone. We will find out precisely what the Bank of England’s MPC predicts for the UK economy when it issues its quarterly monetary policy report alongside its decision on May 8.
This negative growth outlook has made rate cuts more likely. According to monetary policy theory, central banks can tackle periods of inflation by raising interest rates. Doing so restricts the flow of money in the real economy—at the tills and at businesses hoping to make investments—as consumers and creators spend more money paying off their more expensive debt. This acts to “cool” the economy, stifling demand for products and services and lowering prices as money is redirected.
By the same token, cutting interest rates is viewed as a way of stimulating economic activity, as households and businesses have more cash to spend.
With debt cheaper, businesses are more likely to use borrowing to invest for future growth, and current and prospective homeowners’ transactions are made less burdensome, keeping the UK’s vital housing market moving.
In the UK, this is a particularly loaded topic as interest rates are still comparatively high, as the chart below shows. But it is also loaded with the government’s own commitment to fostering higher economic growth in the economy. Since it came to office nearly a year ago, Keir Starmer’s government has struggled to do this.
How Will Stock Markets React to a Bank of England Rate Cut?
Having experienced a significant period of turbulence, during which investors have feared a global recession, UK stock markets will, in principle, react positively to rate cuts.
However, the detail of what the Bank of England says in its quarterly report also really matters. A worse-than-expected downward growth prediction will doubtless hurt already-fragile sentiment. Furthermore, many of the largest companies in the UK are financials—retail banks—whose profits are affected by falling interest rates.
Negative sentiment combined with falling share prices at companies with large market capitalizations could drag the UK’s bigger stock indexes—the FTSE 100 and FTSE 250—lower, even if the news is ostensibly positive. Currency is also a factor here, with the pound rising from $1.24 to $1.34 so far this year as the dollar has weakened.
Nevertheless, the defensive nature of the UK’s stock markets makes it more resilient anyway, says Iain Pyle, investment director at Aberdeen’s Shires Income investment trust SHRS.
“The UK’s 10% baseline tariffs on US exports is relatively benign and there is little indication that the government intends to join other nations in retaliating, for now,” he says.
“Given the UK’s services-oriented economy, it is relatively less exposed to tariffs. Looking for silver linings, tariffs might prove to be deflationary as products shift away from the US and there is increased potential for Bank of England rate cuts, and the government remains focused on stimulating growth.
“While economists forecast anemic GDP growth this year, UK cyclical businesses are likely to be relatively shielded from tariff wars and could stand to benefit from lower interest rates.”
How Will Bond Markets React to a Bank of England Rate Cut?
In the last month, the yields across the UK’s two-year, five-year, 10-year, and 30-year gilts have all fallen reasonably sharply: by around 42, 39, 25, and 13 percentage points, respectively.
The yield on the 30-year gilt is without doubt the highest at 5.24%, though each still yields above current inflation levels—at 3.86% (two-year), 3.98% (five-year) and 4.50% (10-year)—making UK bonds potentially attractive for investors looking for inflation-beating yields.
“Valuations remain attractive compared with other markets and in times of uncertainty the high level of yield generated by the UK market becomes particularly attractive for investor returns,” says Aberdeen’s Pyle.
That said, the picture is a complex one. Yields rise and fall according to intertwining factors, including the expected future direction of interest rates and inflation. While markets expect rates to fall, the Bank of England has very recently predicted an increase in inflation through the end of the year. Bond issuance also affects prices, which run inversely to yields.
Bond investors are also keeping one eye on other important fixed-income markets, including the US, where yields on Treasury notes spiked in the wake of the Trump administration’s announcement of wide-ranging tariffs.
This was in some ways unusual, as falling stocks would normally make bonds more attractive. It remains to be seen whether the increase in yields is the result of market factors, the inflationary implications of protectionism, or a more fundamental shift in the perceived safety of the US Treasuries market—or all three.
Despite headwinds, it’s this comparator that makes UK gilts attractive, says Mark Preskett, senior portfolio manager at Morningstar.
“Over the past few weeks, we have seen some volatility in the long end of the curve, and it is likely this volatility will persist for some time,” he says.
“Investors need to be aware that the new energy price cap and corporate national insurance increases will lead to rising near-term inflation, and the lack of fiscal headroom in the UK has been well documented.
“Despite this uncertainty, we see value in gilts, especially compared with US Treasuries, where yields are lower.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
