Weak UK economic outlook bolsters money market flows

The UK macroeconomic backdrop remains fraught and uncertain. The government is grappling with a “black hole” in its finances and further tax rises are expected in the autumn budget scheduled for November 26. Rising levels of government debt continue to put pressure on borrowing costs, which are at their highest levels since the 1990s, while ongoing global trade tensions threaten to place a further drag on growth. In the second quarter, the UK’s economy expanded 0.3%, while the unemployment rate rose to 4.8% in the three months to August. Inflation, meanwhile, remains stubbornly high. The UK Consumer Price Index held steady at 3.8% in August, making it less likely the Bank of England (BoE) will cut rates in either of its final policy-setting meetings this year, in November or December. Yet we believe the lackluster economic conditions continue to bolster the appeal of sterling-denominated money market funds. Sterling money funds have gained sizeable inflows in recent years and assets stood at around £290 billion September 2025.

The BoE opted to keep rates unchanged at 4% in September. Its Monetary Policy Committee (MPC) voted 7-2 to keep rates on hold but two dissenters pushed for an immediate 25 basis-point reduction. The split is indicative of the high degree of uncertainty about the direction of the economy. In August, a three-way split forced the MPC to vote twice, before the central bank finally announced a 25 basis-point cut. The consensus expectation is that the BoE will begin easing again in March as long as the November budget doesn’t lead to unexpected market volatility. The typical response of investors during a rate-cutting cycle is to extend duration and seek higher-yielding debt further out the yield curve. In the last few months, we have seen exactly that. However, sticky inflation continues to tie the BoE’s hands. It has reduced rates more slowly than might have been expected a year ago.

Wider global pressures

Rising levels of government debt in many developed countries is likely to put additional pressure on long-term sovereign debt yields. Further volatility at the longer end of the curve is widely expected in the near- to medium-term, including in the gilt market.

While the initial fallout from the Trump administration’s rollout of tariffs may have abated, many of the UK’s domestic pressures remain unresolved. We believe this will encourage a more short-dated approach from credit investors. Consumer confidence, for example, seems to have stagnated, on the back of elevated inflation and slowing earnings growth, leaving many people worrying about their household finances. With the autumn UK budget approaching, speculation around potential fiscal measures is likely to inject further volatility into household sentiment. All of the above helps explain why flows are increasing into the sterling money markets.