Welcome to 2025; we have a relatively new government in the U.K. and a freshly minted administration in the U.S. As for the E.U., it seems likely that political issues will only aggravate obvious economic pressures. This is particularly relevant in Germany, its manufacturing powerhouse, which increasingly looks bereft of both political leadership and economic confidence.
At the beginning of 2024, markets expected the Bank of England to deliver four quarter point interest rate reductions. A year later, there have been just two and they arrived well into the second half, occurring in August and November. However, continuation hopes were halted by release of November’s inflation print which saw Consumer Price Inflation (CPI) rise from 2.3% to 2.6%. Perhaps of more concern was that ‘core’ inflation (ex often more volatile food and energy costs) rose at 3.5% while service price inflation added 5.0%. This background certainly poses questions regarding the likelihood of rate cuts in the near future. It would also be wise to assess the effects of the recent Budget, much of which were, by definition, inflationary. Of course, these are yet to register.
In the U.S., the Federal Reserve did deliver a quarter point reduction in December although chairman, Jay Powell, made clear he foresees a slower place from hereon. The U.S. economy is performing better than just about any other at present but it appears that even here, there is a recalibration of just how far borrowing costs can realistically fall.
