What this chart shows
The chart above shows the latest 25bps rate cut by the Bank of England (BoE) to 4.5%. This is the lowest the policy rate has been in 19 months with two of the nine policymakers in the Monetary Policy Committee (MPC) supporting a 50bps rate cut on February 6, 2025. The bank signalled a ‘gradual and careful approach’ to future rate cuts, forecasting two more quarter point reductions by the end of this year, in an effort to reign inflation back to the BoE’s 2% target. This is now the third reduction in policy rate since August 2024, with the BoE halving growth expectations and raising its inflation forecast.
Whilst the US Federal Reserve has moderated its monetary policy easing in the face of sticky inflation and uncertainty surrounding President Trump’s trade tariffs, the UK (and Europe) are on different paths due to lacklustre economic growth. Both the UK and European central banks are now expected to cut rates more than previously forecast in an effort to support growth.
In the UK, the Bank of England views Chancellor Rachel Reeves’ decision to raise employer national insurance contributions as having a greater-than-expected impact on jobs and prices. As a result, it has revised its economic growth forecast for this year to just 0.75%—half of its November projection. Meanwhile, inflation is expected to rise further and peak at 3.7% by the third quarter of 2025.
Why this is important
UK government bonds have had a volatile start to the year, with the market’s views on the BoE’s interest rate path seesawing since November due to uncertainty around the potential for tariffs on the UK and the impact of chancellor Reeves’ October Budget. Markets had until today been reticent to price in a more aggressive rate cutting path, fixated on a terminal rate of 4%, mainly on the back of expectations that increased government spending would be inflationary. However, markets seem to be coming round to the idea that there is another component in the fiscal equation and that is the likelihood of increased taxes, which on a net basis should keep fiscal policy tight.
There is little reason to doubt that the UK will maintain its fiscal discipline, particularly in light of the turmoil in bond markets caused by Liz Truss’ budget and the lasting damage to the country’s fiscal credibility. With ongoing uncertainty in global trade, the prospect of a tight fiscal policy, and a significant downward revision in growth forecasts, the likelihood of additional rate cuts appears higher than what is currently priced in.
Last week was marked by significant global trade tensions, primarily driven by the US imposing tariffs on multiple countries, leading to market volatility, corporate earnings impacts, and concerns over global economic growth.
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Tariff concerns continue: President Donald Trump imposed 25% tariffs on imports from Mexico and Canada, and 10% on Chinese imports, leading to swift retaliatory measures and global market concerns.
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Stock market volatility: Major indices such as the Dow Jones, S&P 500, and Nasdaq experienced declines between 1% and 2% due to fears of a global trade war.
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Job market data: The US added 143,000 jobs in January, below the expected 168,000, with unemployment slightly decreasing to 4%.
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Corporate earnings: Alphabet's shares dropped by 7% following a weak earnings report, attributed to underperformance in cloud computing and increased AI investments.
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Interest rate cut: The Bank of England reduced interest rates from 4.75% to 4.5% to stimulate the economy amid rising prices and slowing growth, as expected
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Inflation outlook: Despite the rate cut, the Bank warned that inflation could peak at 3.7% by autumn, nearly double the government's target.
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Trade concerns: UK markets were affected by global trade tensions, with potential implications from US tariff policies under President Trump.
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Corporate restructuring: Lloyds Banking Group announced a restructuring plan that could result in 200 job losses.
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Tariff uncertainty: European companies expressed concerns over potential US tariffs under President Trump's trade policies, leading to slowed investments, particularly in sectors like wind and solar energy.
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Market reactions: Major European stock indices, including Germany's DAX and France's CAC, experienced declines of over 1% due to trade war fears.
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Economic forecasts: The European economy is projected to recover modestly, with growth increasing from 0.9% in 2024 to 1.3% in 2025, supported by easing inflation and resilient labour markets.
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Corporate earnings: Companies like Volvo Cars and Diageo anticipate lower profitability due to trade uncertainties and potential tariffs.
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Tariff impacts: In response to US tariffs, China announced retaliatory measures, escalating trade tensions between the two nations.
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Market response: Chinese markets faced declines upon returning from the Lunar New Year holiday and the Chinese yuan weakened to a 14-month low against the US dollar, reflecting concerns over the economy and trade tensions influenced by the US tariff hikes.
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Currency surge: The Japanese yen experienced a significant increase following promising wage growth and inflation-adjusted wage increases, suggesting potential interest rate hikes by the Bank of Japan.
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Energy markets: Oil prices surged due to anticipated supply disruptions amid global trade tensions, with Brent crude reaching its highest level in two months.
