Cautious Recalibration

The Bank of England reduced the base rate by 25bps for the third time since August, to 4.5%. The hawkish shift in the new Bank of England forecast highlighted ongoing concerns of sluggish economic performance and rising inflation pressures but was balanced by the dovish vote split. Trump’s tariff reprieve for Canada and Mexico paired with China’s muted response to Trump’s escalation provided relief for markets. Further, job growth in the US slowed somewhat last month and unemployment remained low, signalling a solid labour market. Meanwhile, the EZ faces a delicate balancing act as inflation in the bloc continues to be unyielding.

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Check out a glossary of key terms here.

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What’s the latest in the UK?

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Tightrope. Bank of England lowered interest rates by 25 bps, taking the base rate to 4.5%. The decision, with 2 members voting for 50bps cut, comes amid weaker economic growth and rising inflation pressures. The near-term inflation forecast was revised up by c.1pp compared to November (it’s set to reach 3.7%) – energy is the big contributor. Inflation is heading higher, but the ‘t-word’ is back - the MPC believes the price surge will be temporary with no second-round impacts. Yet stronger than expected wage growth continues to threaten that judgement. Further, the BoE’s growth outlook for ’25 has been halved from 1.5% to 0.7%. Markets are now pricing between three and four cuts in total this year. Read more here.

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Stalling employment and stubborn inflation. Delivering only a marginally brighter outlook than recent PMIs, January’s Decision Makers Panel (DMP) survey suggests that tariff uncertainty and the rise in employer NICs likely weighed on employment and boosted inflation. Annualised employment growth fell to -0.5% in January, while expectations for growth over the next year weakened. Meanwhile, expectations for both firms input costs and output prices remained relatively unchanged, with the former rising 0.1% to 3.9% and the latter falling by 0.1% to match at 3.9%. This means firms now expect to raise their prices more over the next year than they did during the past year. Read more here.

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UK business creation hit a speed bump in late 2024. New business demography data shows that business creation hit its lowest point since records began in 2017 with only 65,450 new businesses births in Q4, a sharp drop from Q1’s five-year high of 248,000. Despite the year-end slowdown, NatWest’s New Startup Index, which draws on Companies House business registrations, shows that entrepreneurial spirits remain resilient with almost 850,000 new start-ups registered in 2024 and a record 5.63 million active companies nationwide. Additionally, business closures fell 7.3% last quarter compared to late 2023, offering a silver lining. Read more here and here.

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A re-escalation of the trade war stokes growth and inflation fears. But given the UK isn’t a near-term focus for tariffs, can it breathe a sigh of relief?? It’s not quite that simple. As UK business and consumer surveys have often reflected in recent months, policy uncertainty can sap growth as businesses adopt a “wait-and-see” mode and consumers retrench. Trade policy can be similar, with one measure of US trade policy uncertainty spiking to levels last seen during Trump’s first Presidency. That’s expected to weigh on global industrial production. The Bank of England views the impacts on inflation are more ambiguous. While ECB President Lagarde isn’t “overly concerned” about importing US inflation should price pressures there reignite. Still, tariff wars could go a many number of ways!?

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What’s the latest in the Global Economy?

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A Flash in the Pan? The US ISM Manufacturing index rose to 50.9 in January, a modest uptick from 49.2, and above the consensus of 50.0. New orders index jumped to 55.1 while the production index moved to 52.5. Employment index also nudged higher to 50.3. Price index rose to 54.9 – more likely a result of volatile input prices than tariff at this point in time. But the survey results may be deceptive. It could reflect a surge in the activity before the tariffs take effect. If so, the boost might be short-lived, and the sector could soon face supply chain disruptions instead. Read more here.

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Job growth slows, but the labour market remains resilient. US unemployment rate fell to 4.0% in January, down from 4.1% in December, with employers adding 143,000 jobs, below the expected 170,000. Gains were led by health care and retail sectors, while mining and oil and gas industries saw declines. The monthly job creation figure is in line with the 2024 average of 166,000. While jobs data is subject to revisions, January’s figures signal a stable labour market. However, the outlook for 2025 remains uncertain, with potential shifts in trade tariffs, immigration policies, and a scaled-back federal workforce reshaping the labour market. Read more here.

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No sign of Eurozone inflation returning to target quite yet. Despite being “well on track” to fall below 2%, according to ECB President Lagarde, the Eurozone inflation rate climbed 0.1ppt to 2.5% in January. Core inflation held firm at 2.7%. Blame energy prices, which jumped 2.9% over the month. There’s cheerier news for non-energy goods inflation, which held steady at just 0.5%, and services inflation, which eased-off slightly to 3.9%. So, can the ECB hit its sub-2% mandate soon whilst continuing to trim rates? It’ll be a tall order given bubbling pressures on energy and food & drink prices, let alone trade wars. Read more here.

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Central Banking's Next Chapter. Bank for International Settlements General Manager Agustín Carstens reflects on monetary policy lessons from recent decades. While inflation targeting remains valuable, the post-pandemic surge revealed that inflation risks are bilateral rather than primarily deflationary and thus central banks must recalibrate their approach. Key recommendations include maintaining flexible policy tools, improving communication of uncertainty, and ensuring frameworks can withstand unpredictable economic shifts or supply shocks. The speech cautions against over-correcting successful frameworks but emphasises the need for adaptation. Additionally, fiscal policy support is crucial, with growing fiscal deficits and public debt presenting additional challenges that could impact central banks' ability to maintain price stability. Read more here.