Economic deep dive Q2 2025

Quarterly highlights

Mixed messages on economic momentum over early 2025

The UK economy posted strong growth in Q1 2025, with GDP expanding by 0.7% quarter-on-quarter. However, this sat somewhat at odds with business surveys (including our own), which pointed to weaker momentum over the quarter. The latest CBI Economic Forecast projects that growth will be more subdued going forward, averaging 1.2% in 2025 and 1.0% in 2026.

Inflation remained elevated, and above the Bank of England’s 2% target, in Q2

CPI inflation remained elevated in recent months, reaching 3.5% in April and 3.4 % in May. Price pressures came from higher energy prices (following a 6% increase in Ofgem’s energy price cap), alongside an increase in number of regulated prices. Pass-through of higher business costs may also have played a role, as the rise in employer NICs and the National Living Wage came into effect. The lingering impact of all these factors means that inflation is likely to remain above the Bank of England’s 2% target this year and next.

Bank of England set to maintain path of gradual interest rate cuts

The Bank of England’s Monetary Policy Committee (MPC) have cut UK interest rates by a cumulative 100bps over the past year, bringing Bank Rate to 4.25%, reflecting an easing in inflationary pressures. We expect that the MPC will reduce Bank Rate by a further 25 basis
points each quarter until early next year, until reaching a terminal rate of 3.50% in Q1 2026.