Interest Rate Monthly Outlook - 1st July 2025

Executive Summary

Uncertainty has been central bankers’ favourite word since the beginning of April and that shows no signs of changing anytime soon. An unsteady ceasefire holds in the Middle East, and we are fast approaching the end of the 90-day pause on reciprocal tariffs. These are typically leading indicators of inflation. However, oil prices have remained fairly neutral since the escalation of the conflict and we wait to see what happens to tariffs. There still remains a disinflationary and dovish macro environment and it is likely this will continue. There are 39 central bank meetings in July with the most notable being the Fed, ECB, Bank of Japan (BoJ), and the Bank of Canada. Of 144 countries surveyed, 20% cut rates in their last meeting, with only 3% raising them.

	Core CPI YoY (Vs last month)	Central Bank Base Rate	3 Year Swap (Vs Last Month)
UK	↡    3.4%  (3.5%)	4.25%	↡ 3.55% (3.74%)
US	2.8%  (2.8%)	4.25-4.5%	↡ 3.37% (3.52%)
Europe	↡    2.3 % (2.7%)	2-2.4%	↟ 1.95% (1.90%)

United States

What have we seen?

The May data gave very little indication of inflationary effects of tariffs when it came to headline numbers. It was in reference to this that the President and others wanted a rate cut. However, what the Fed saw was that core PCE surprised on the upside by 0.1% (2.7% YoY). This was complemented by a rise in output prices. Both of these factors led the Fed to hold in June.

What to expect?

There are still expectations of higher inflation with markets expecting CPI to be between 3.3% to 3.8% by year end. The next Fed meeting could be quite exciting as there is a split emerging between FOMC members. Chair Powell is firmly on the hawkish side of the debate but there is growing support for 25bps cut in July. The market currently estimates a 21% chance.

Eurozone

What have we seen?

Eurozone inflation fell to 1.9% YoY for May. This was met with a 25-bps rate cut by the ECB at the beginning of June which marked the 8th cut in the last 12 months and an insinuation that we are near the end of the rate cutting cycle

What to expect?

As the Euro continues to strengthen against the Dollar this could put continued downward pressure on inflation. Some expect EUR/USD to surpass 1.20 in the near future. This could see the EU’s terminal interest rate fall to 1.5% but that is unlikely in the short-term. The market still only predicts one more cut by the end of the year. The ECB conference happening in Portugal currently will continue to provide guidance for investors on the outlook.

United Kingdom

What have we seen?

UK inflation data surprised on the downside with output inflation at its lowest in 4 years despite price pressures from the April tax rises. This was seen in the falling of the UK composite PMI index to below 50. There is also an unfolding situation with BoE’s divisive QT programme. Opponents say that active bond sales will drive up the cost of long-term borrowing and that it should be stopped.

What to expect?

These slowing inflationary pressures have been accompanied with slowing GDP growth, 0.1% in Q2 vs 0.7% in Q1, and falling employment. This makes for a ripe environment for a rate cut at the BoE’s August meeting. This is a view that is broadly held by the market who have priced in an 84.5% likelihood of a rate cut.

Emerging Markets Spotlight

Turkey

Turkey’s economy hangs in the balance but there are signs of hope. As part of a new economic programme, the CBT has been able to raise interest rates in response to inflation. This change of attitude comes as Erdogan’s popular support has been significantly weakened as cost-of-living has spiralled out of control. This has not been helped by a significant depreciation of the Lira (80% over the last 4 years) as a result of poor economic policy and authoritarianism. The headline rate is currently 46%. This has helped to bring inflation down to a 35-40% range and hopefully bring real rates back to positive. If this does happen then there is a possibility of rate cuts at the next CBT meeting in July.

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