Hard Data And Deferred Decisions
Economic data releases have continued to bifurcate broadly between resilient hard data and the significantly softer signals from surveys. Like us, central bankers have mainly focussed on the hard data rather than panic over dovish developments that might be no more than noise. Uncertainty is high around policies that are widely disliked, which might have shifted vibes more than reality. UK and US policy rate pricing shifted a bit higher without the ECB, consistent with our view.
Weighing on the ECB is the 5bp downward revision to the Euro area inflation print for February, which rounds it down to 2.3%, reversing the upward surprise from the flash release. French energy utility prices drove the initial decline, and petrol prices seem set to drag it down further in March. However, the median impulse is also relatively subdued. We believe ECB policy is unlikely to be affected by this revision and the temporary impact of energy prices on inflation. We still expect it to hold rates in April before a final cut in June (see EA Inflation Shrunk For Spring 2025).
Updated inflation basket weightings can shift the outlook without any new fundamental shock, but the UK’s seasonal and trend outlook was unaffected by the ONS’s 2025 update. Although our forecast is broadly unchanged, this still mitigates the risk that reduced weights on energy and sanitation utilities dampen the surge in April and July forecasts. This outcome further emboldens our confidence in our above-consensus forecast (see UK Inflation Excess Survives Reweighting).
UK inflationary pressure still arises from the labour market, where unemployment remained at 4.4% amid rapid employment growth. Moreover, the UR will likely decline over the next few months. Regular wage growth adhered to its 0.4% m-o-m trend, with the near 6% y-o-y rate no better than a year ago. Financial sector bonuses weigh temporarily on total pay. Doves can temporarily dismiss this inconvenient resilience as unreliable noise, but the obvious risk is that its genuine and monetary stimulus has already become excessive (see UK: Tight Jobs Market Persists Into 2025).
The BoE unsurprisingly held its policy rate at 4.5%, maintaining its gradual easing path following the resilient recent releases. Only one MPC member dissented for a 25bp cut. Catherine Mann did not carry the extra 25bp of easing she supported from February to March. Her hyperactive vote relied on so little spurious evidence that it was swiftly falsified. Core members emphasise the lack of a predetermined path, raising the hurdle to a May cut, but this remains the most likely outcome, even if it may require a rapid reversal (see BoE Dove Beaten Into Submission).
Our call for rate hikes in 2026 isn’t something major central banks consider yet. Nonetheless, the hard data still seem consistent with our scenario. Brazil also remains a metaphorical canary, as it has led the global cycle by a year, and it has hiked to a fresh high, with more to come. Japan is a laggard but also seems set to hike again. The Riksbank held and doesn’t expect to resume cutting. Indonesia also held rates but, like the Fed, is open to cutting again. The Swiss National Bank is the dovish outlier in cutting by 25bp to 0.25%, although the low level should be viewed in its historical context. Easing has reversed a bit more than half of the previous hikes, which isn’t that unusual.
Forecasts
Wednesday, 26 March’s fiscal forecast update has evolved into a fuller Budget. That is unfortunate for the Chancellor, who hoped to downgrade this event to enhance policy stability by only changing policies in the Autumn. The circumstances are even more regrettable. Approximately ￡15bn of slippage since the Budget exceeds the ￡10bn of headroom in the fiscal target, necessitating action to avoid an unresolved breach.
Already announced welfare changes are expected to save around ￡5bn, with improvements also potentially arising from postponed activity. Squeezing indicative departmental spending plans can do the rest, preserving a similar amount of fiscal headroom in the projections, even though those cuts are unlikely ever to happen. Massive tax hikes in the previous fiscal statement may deter the Chancellor from returning so soon for more. Yet taxing more to pay for an expanding public sector is effectively the government’s strategy, so we’d expect additional tax hikes later.
UK inflation data for February, released on the morning of the Budget, will likely be overshadowed in press reporting yet remain central to the monetary policy outlook and market pricing. February may not have many administered price changes, but it tends to be a seasonally strong month as prices normalise after the January sales. We expect a similar overall rise this year, keeping the CPI at 3% y-o-y. However, the RPI slows in our forecast to 3.5%, partly because the contribution from mortgage interest payments softens now that the BoE is cutting, not hiking.