Nomura has highlighted that the United Kingdom’s economy is being driven by services-led growth, while persistent price pressures continue to complicate the Bank of England’s policy path. The analysis, released on March 19, 2025, notes that robust activity in hospitality, travel, and financial services is offsetting weakness in manufacturing and construction. Official data from the Office for National Statistics showed the services sector expanded by 0.4% in January 2025, the fastest pace in six months.
Despite the resilient growth picture, Nomura warns that services inflation remains sticky at around 5.2% as of February 2025, well above the Bank of England’s 2% target. The firm attributes the pressure to strong wage growth in labor-intensive services industries and the pass-through of higher energy costs. With headline inflation at 3.0%, Nomura expects the Bank Rate to remain at 4.5% through the summer, and markets are pricing in only two 25 basis point reductions by the end of 2025.
Separately, the British pound slipped against the US dollar after UK retail sales fell more than expected, while the US services sector outperformed according to the Institute for Supply Management’s services PMI. The stronger US data reinforced expectations that the Federal Reserve may keep interest rates higher for longer, widening the policy divergence between the Fed and the Bank of England. As a result, GBP/USD came under renewed pressure as traders reassessed the timing of central bank easing.
