# Market Update - UK _UK markets have bounced back, the economy looks stronger than the headlines suggest, and the MPC has cut rates — but not by enough._ Neil Woodford · 9 May 2025 · 10 min read ![Market Update - UK](https://cdn.sanity.io/images/v3acfbvo/production/c1e5cb23e9fc5f9855ceff7db2e99d429c269431-4856x3238.jpg?w=1600&fit=max&auto=format) --- ## Equities, bonds and interest rates In common with all other global indices, the UK equity market had a major wobble in April following President Trump’s tariff announcement at the beginning of the month. In the space of just over two weeks, the FTSE 100 fell by over 11% but has since recovered all of that slump. In my opinion, it now stands poised to make further gains through the remainder of the year despite the headwinds created by the aftermath of the tariffs and much lower oil prices, which have negatively impacted two of the largest listed businesses in London, BP and Shell. Despite today’s reticence from the MPC (see below) which has only cut rates by 25bps, the prospect of more cuts to come through the remainder of the year combined with improving sentiment following the trade deal with the US, should provide an improving backdrop for the UK equity market which I expect to continue to outperform other global equity indices based on its outstanding valuation attractions. I would also expect to see further outperformance of those sectors focused on the domestic economy, where, in general, company results are on an improving trend, but also where the valuation attraction is greatest. For example, in the financial sector, all three large domestic banks, Barclays, Lloyds and NatWest, announced consensus-beating Q1 numbers in the last month. In the housebuilding sector, there are clearly signs of a significantly better trading environment gradually emerging. Specifically, Persimmon and Taylor Wimpey both reaffirmed higher completion expectations for the current financial year alongside flat input prices and modest house price inflation. Elsewhere, amongst the domestic economy-facing sectors, a number of retailers, including Next and Tesco, have also announced better-than-expected numbers. I should emphasise that these results do not provide unequivocal evidence of a better-performing economy, but the probability of a much better outcome in the UK than is predicted by the consensus is definitely building. In some ways, what the MPC has said today confirms this better outlook (more below) despite the more cautious headlines accompanying its rate decision today. I hadn’t intended that this note would cover all of the results announced by the UK-based companies I write about, but there is one other business that I have decided to mention that has reported today. The business is Burford Capital, one of the companies I follow. It is an unusual business with no listed UK peers. Its principal activity is the provision of litigation finance, risk management, asset recovery and a wide range of additional advisory activities. In my opinion, it is not a well-understood business, partly because of its uniqueness, but it is unequivocally a high-quality, very well-managed and high-return business. Because of the nature of the underlying business, it is hard to forecast precisely what it will deliver quarter to quarter, and despite the company’s best efforts, the market, its shareholders and some of the analysts that follow it still fail to interpret its performance properly. That said, the first quarter of its 2025 financial year has started very well on all its key metrics, which bodes well for the remainder of the year and beyond. Finally, to the UK gilt market. For a while, I have been saying that bond yields would fall through 2025 and not rise as the OBR anticipates. After a wobble earlier in the year, this is precisely what is now happening across the world’s government bond markets. Ten-year yields in the UK are now just above 4.4%, and I expect them to fall further to 4% and possibly below later in 2025. ## Yesterday's interest rate decision Yesterday, the MPC has announced that UK base rates will fall by 25bps. This was what was widely expected. Recently, I have argued in several blogs why rates needed to come down in the UK, and I had hoped for a more significant cut today. The outlook for rates, in my opinion, remains the same. They will continue to fall from their current level of 4.25% down to 3% in about a year’s time, in part tracking the clear path I see for UK inflation, which will return to target later this year or early next year. Having said that, I can’t resist the temptation to pull apart what the MPC has said, not least because much of the commentary that has accompanied the decision is impenetrable nonsense. First, to the MPC’s growth and inflation forecast. Amongst all the guff, there is what I had anticipated, which is a higher growth forecast for 2025 and a lower inflation forecast. The forecast for growth has increased from February’s 0.75% to 1% for 2025, and the inflation expectation is lower, although still way too high from April through to the end of the year. Before commenting on some of the contradictory nonsense in the accompanying narrative to the decision, I should say that the growth expectation is still too low for 2025 in my judgement, and the inflation forecast is still too high. I expect the economy to deliver close to 1.5% growth and that inflation will peak at somewhere close to 3% in April and fall significantly thereafter. In my view, the committee’s downgraded growth forecast for 2026 is also wrong. I expect the economy to accelerate in 2026 and to deliver something in excess of 2% growth next year. (I should point out that the MPC and OBR are now quite far apart regarding their 2026 growth forecasts. The MPC is at 1.25% and the OBR at 1.75%, which begs the question of why we have these two important policy bodies developing different forecasts with presumably different models. Which one is the government to believe, I wonder?) Whilst I am at it, I thought that I should also highlight yet another revision of recent history which I am confident will receive absolutely no attention in the media but which once again shines a light on the volatility of trade data and its consequential impact on what the MPC and OBR tell us about what is going on in the economy. Back in a blog I published on March 6th this year, I showed why the Bank of England had downgraded its growth forecast for the UK economy (I said it would have to upgrade later in the year, which it has done today). At the time, the biggest single explanatory factor in the Bank’s downgrade was a change in its forecast for the contribution of net trade, which went from minus 0.75% in November 2024 to minus 1.5% in February. I said at the time that this was an especially noisy and volatile series. Although this change was largely responsible for the Bank’s downgrade in February, it would likely be significantly revised. Well, surprise, surprise, that is precisely what has happened today. The Bank’s forecast for the contribution from net trade has decreased from minus 1.5% to minus 0.5%. Once again, this significant change has received no attention, which is especially odd on a day when the Bank is keen to tell us that the biggest threat to the economy is an unspecified trade impact due to Trump’s tariffs. There are also some perplexing comments from the governor and from members of the committee that sit alongside this decision, which was far from unanimous. Indeed, two members of the Committee wisely voted for a 50bps reduction, but two others voted for no change. Let me give you a few examples. 1. The committee upgraded its 2025 growth forecast (and downgraded 2026) but at the same time said that the sharp 0.6% increase in GDP in Q1 was largely accounted for by “erratic factors” as sales were brought forward to avoid tariffs. The statement suggests that the underlying growth rate in the first quarter was “around zero”. 2. The committee was clear that the main threat to the UK was from the global impact of US tariffs on the UK’s open economy. 3. Catherine Mann, who two meetings ago had voted for a 50bps cut, decided this time that no cut was advisable because of “inflationary persistence due to supply-side problems in the UK.” 4. The committee accepted that even after the 25bps cut, rates are still effectively “bearing down” on growth and inflation, while the risk to growth is “somewhat to the downside”. In effect, the committee has said that the strong growth in Q1 was an illusion and that “underlying “growth was close to zero. So, given that the economy flat-lined in the last six months of 2024, the last nine months have seen virtually no growth in the UK economy, according to the MPC. If they really believed that, why did they not cut by more? Although the MPC mentioned “underlying growth”, they didn’t specify what this meant. I am also perplexed by the comment that sales were brought forward in Q1 to avoid tariffs. My question is, what tariffs were being avoided? The UK government has announced no tariffs on any goods, and indeed, since April 2nd, has been speaking about trade deals with the US and India. I am also wondering how this mythical tariff avoidance could possibly affect the sectors that were stronger than expected in Q1. In particular, construction and services output were both significantly better than expected in Q1, but neither sector is affected by tariffs. Very odd. The committee discussed tariffs as the main threat to the UK economy on the same day a comprehensive trade deal with the US was announced. The irony of this, I hope, is not lost. In summary, I completely disagree with the committee. I have previously written about the irrelevance of Trump’s tariffs on the UK economy and would add that, in my opinion, the biggest threat to UK growth is the failure of the MPC to get rates to a sensible and appropriate level. Catherine Mann’s erratic voting is somewhat perplexing, too. At the last but one meeting, she voted for a 50bps cut. Since when, according to the committee, the economy has flat lined in “underlying” terms. But this time she voted for no change, citing inflationary persistence due to supply-side problems in the UK. Why were these same supply-side issues not relevant to her back in February? Surely, the unmeasurable supply potential of the economy cannot have changed in less than three months, so why the dramatic change in her voting? Again, very odd. Finally, to the committee’s summary that rates are effectively “bearing” down on growth in the UK (and inflation) and that the risks to growth are to the downside. Again, if the committee believes this and also believes that the economy has effectively not grown for 9 months, why did it not cut rates by more than 25bps? (After all, the ECB has cut rates to 2.25% and yet the EU economy has the same inflation rate as the UK) None of this makes sense to me. As usual, the MPC’s May 2025 Monetary Policy Report is very long and full of interesting data and detailed scenario analysis, conditioning assumptions, and other detailed analyses, but to my eye, totally inconsistent. It is, yet again, another great example of arcane complexity and rubbish judgement. The committee’s conclusions on underlying growth and inflation are not at all consistent with its decision, and its fears about tariffs are inconsistent with reality. As a result, it is still, in my opinion, way too pessimistic on both. The pages of academic mumbo jumbo dedicated to unmeasurable concepts such as excess supply, capacity utilisation, the output gap and potential GDP may be interesting but useless in guiding the appropriate policy decisions the committee is charged with making. Again, the comparison with the pragmatic simplicity of what the FED says and how it explains its decisions could not be more stark. Nevertheless, we are where we are and at least we have a cut in rates to welcome. More will come later in the year, but once again, I lament the Bank of England’s hopeless forecasting record, its love of complexity and academic economic nonsense, and hope that one day it recognises that there is a better, more pragmatic and helpful way to set monetary policy here in the UK. ## Aside I thought it might be worth explaining why I am so scathing about academic concepts like potential supply and demand and inflationary and deflationary gaps, which are the sorts of things that the academic economists on the MPC seem to obsess about. The context here is, as we already know, measuring what is actually going on in a complex economy like the UK is challenging. It is clear that the ONS has been struggling for a long while with the measurement of basic things like population, immigration, output, productivity, and trade data, and so much so that the ONS’s regulator has announced that the ONS must take decisive action to restore confidence in its economic statistics, particularly in its survey operations. My point is, if it is as challenging as it appears to be to calculate these basic things, how valuable is the attempt to measure supply potential, the output gap and capacity utilisation? All may be interesting academic concepts, but they are impossible to accurately measure in a real, complex economy like the UK. They should not feature in judgements about what’s actually happening, nor should they inform policy decisions. If any readers doubt what I’m saying, I would advise them to think about the potential supply of the business that they work in or indeed the actual supply of that business. My guess is that readers will not have a clue. I certainly wouldn’t know where to start, either.