Monthly Cash Review – GBP State Street GBP Liquidity LVNAV Fund, September 2025
GBP INVESTMENT UPDATE – SEPTEMBER 2025
The Bank of England (BoE) Monetary Policy Committee (MPC) voted by 7-2 to maintain the base rate at 4.00% at the 18 September meeting, an outcome that was widely expected.
Economic Data
- Headline inflation for August remained steady at 3.8%, while the core inflation eased from 3.8% to 3.6%, both of which were in line with consensus expectations. Services inflation dipped from 5.0% to 4.7%, marginally below the BoE’s forecast of 4.8%. The declines in core and services inflation were mainly due to a drop in airfares inflation. Food inflation rose again, up from 4.9% to an 18-month high of 5.1%.
- GDP for July was flat, in line with consensus expectations, following month-on-month growth of 0.4% in June.
- The S&P Global composite purchasing managers’ index (PMI) fell from 53.5 in August to 51.0 in September, lower than consensus expectations of 53.0—readings above the 50 level are indicative of growing economic activity. The services PMI fell from 54.2 to 51.9 and the manufacturing PMI output balance slumped from 49.3 to 45.4. The employment PMI remained broadly unchanged at 46.6.
- The unemployment rate for July remained stable at 4.7%. Private sector regular pay growth eased from 4.8% to 4.7%, keeping it on track to meet the BoE’s forecast of 4.6% for September.
Markets
Policy guidance from the BoE was essentially unaltered with the statement retaining text that “a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate”. The BoE view was that the flow of data since August contained "limited economic news". It was noted in the minutes that there appeared to be "less of an immediate risk that the labour market would loosen very rapidly" while "upside risks around medium-term inflationary pressures remain prominent in the Committee’s assessment of the outlook". There is a concern that the recent rise in inflation could feed into wages. The committee retained language that policy is not on a "pre-set path" and will remain "responsive to the accumulation of evidence", aiming to retain maximum optionality—this means that decisions will be data dependent on a meeting-to-meeting basis. BoE Governor Andrew Bailey stated that he continues "to think that there will be some further reductions, but the timing and scale of those is more uncertain". In addition, the MPC voted to slow the pace of its QT programme from £100bn to £70bn, which was a smaller reduction than the consensus forecast.
On the economic data front, headline inflation has rebounded significantly from 1.7% in September 2024 due to rises in utilities, fuel, and food inflation, as well as some one-off jumps in water bills and vehicle excise duties. It is expected to peak in September before dropping back. GDP data continues to reflect an economy that is still struggling to gain momentum from the drag of previous hikes in taxes and the possibility of more to come in the Autumn Budget. September’s flash PMI reports suggest that the downside risks around economic activity may be growing. The unemployment rate has risen as businesses continue to reduce headcount to counter the April rises in the National Insurance Contributions for employers and the minimum wage.
The Autumn Budget is scheduled for 26 November and there is much speculation around what the final outcome will look like. Policy U-turns around welfare and winter fuel cuts, rising gilt yields, and increased public sector borrowing increase the risk of a larger hole in the public finances and raises questions around this will be financed. The new youth employment scheme announced at the Labour party conference and the elimination of the two-child cap on child benefit, will require financing at a future stage. There is an expectation is that circa £30bn of fiscal tightening is required in the upcoming budget, with Chancellor Rachel Reeves expected to raise taxes. The question then shifts to how this will be implemented. The prospect of larger tax rises than previously assumed will likely dampen activity in the near term.
The recent pickup in headline inflation and the expectation of a further increase in September is likely to keep the BoE on hold. Market implied rates (Figure 1) for October finished the month at 3.95%, meaning the market expects the base rate to remain at 4.00%. The implied rate for December ended September at 3.91%, suggesting diminishing expectations for a rate cut before the end of 2025.
Fund
Following the September BoE meeting, market pricing remains unchanged with no further interest rate cuts expected for 2025. Gilt yields remain elevated ahead of the November budget and given the uncertainty around what the budget could contain, fund investments were shortened to reduce fund weighted average maturity (WAM) and higher liquidity levels were maintained to provide additional flexibility against any potential market volatility. The fund took advantage of high-yielding, short-dated issuance from sovereigns, supranationals, and agencies, along with rising overnight gilt repo yields. Fund liquidity requirements, both overnight and weekly, remained well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo and bank deposits. The fund credit rating exceeded requirements at all times.