4 March 2025: Mortgage take-up rose in February, spurred on by the cut in rates

The number of property buyers in the UK grew in February, in terms of both the number of transactions approved and the Sterling value of those transactions, spurred on by the cut in interest rates last month.

This showed the effect on the economy of a continuing cycle of rate cuts, however, despite a significant shift seen in the voting patterns of the MPC, it may well be that that cycle will be broken until at least the end of the second quarter.

The Bank’s Governor, Andrew Bailey, is concerned about the possibility of another inflation surge given the global economy’s current uncertainty.

His colleague David Ramsden, whose voting record leans towards the dovish, voted for a cut in December, one of only three members, but didn’t join those who voted for a fifty-point cut last month. He spoke at a conference last week, at which he backed the Bank’s “gradual and careful” approach to rate cuts, pointing to “increased uncertainty”.

Ramsden, who is the bank’s deputy governor for markets and banking, pointed to the combination of rising inflation and weak economic growth.

While the Bank cut interest rates to 4.5% at its February meeting, the chances of further rate cuts took a knock after higher-than-expected inflation figures in the weeks since.

The core rate of inflation across the economy rose to 3% in January from 2.5% in December, and while he did not pour cold water on more cuts, he also said there is more risk of inflation rising than there was before.

He said: “Given the increased uncertainty and risks to inflation on both sides, I am even more certain than I was that taking a gradual and careful approach to the withdrawal of monetary restraint is appropriate.”

The fact that two senior colleagues who are permanent members of the MPC see inflation as a greater concern than economic growth shows that at the margin both are still hawkish in their outlook.

At the weekend, Rachel Reeves announced that she would use the profits of frozen Russian assets to fund a £2.26 billion loan scheme to help Kyiv fund its reconstruction and buy weapons.

However, the Government is facing calls to go further and use the assets themselves.

Conservative former cabinet minister Sir John Whittingdale said ministers should ‘start thinking’ about whether they can use the frozen assets.

“The announcement that we are going to use the interest on the frozen Russian assets to fund Ukraine is quite a big step forward,” he told the BBC on Sunday night.

‘I think we need to start thinking about whether we can’t use those assets ourselves. This radical approach may be too far for the Prime Minister, given the delicacy of his diplomatic approach to the Ukraine conflict.

Although he has labelled Vladimir Putin as the aggressor, he still needs to work to bring Putin to the negotiating table.

The pound had a robust performance yesterday, rising to a high of 1.2724 and closing at 1.2697, its highest closing level since December 17th.

The “Chainsaw” approach to the Federal Government’s staffing levels is expected to continue as the Administration’s Secretary of Government Efficiency. Elon Musk told reporters that the Federal Government is “absurdly overstaffed.”

His success in running Tesla allows Musk to make such suggestions, but it will drive an icy blast through those workers who have been in the government’s employ for decades, and who may now see their livelihoods vanish.

It seems a desperate measure to alienate several thousand workers who showed their loyalty to the Republican cause by returning Donald Trump to power.

Protests have erupted outside Tesla stores across the United States, as demonstrators speak out against CEO Elon Musk and his advocacy for government spending cuts in collaboration with President Donald Trump.

The demonstrations reflect a growing wave of discontent in both North America and Europe about Musk’s influential role in Washington.

Critics of both Trump and Musk aim to discourage the purchase of Tesla cars and tarnish the carmaker’s reputation.

Musk is not the type to back off from a challenge, particularly since he has the President’s backing, so this is an issue that could become a significant problem.

Donald Trump’s determination to apply tariffs on American imports from its three largest suppliers will reach a day of reckoning this week as fears grow that the effect on the economy will be serious enough to drive it into a downturn.

Trump will need to pause for a moment to consider the inflationary effect of the tariffs, which has already caused the Federal Reserve to pause its cycle of interest rate cuts. If inflation begins to rise like it did a couple of years ago, that pause could become semi-permanent.

The pace at which Trump is trying to stamp his authority is beginning to raise fears in even his staunchest supporters, while his scatter gun approach to economic and foreign policy is driving significant consternation in Congress.

He maintains his broad support from the voters who drove him to power in November, but the MAGA theme is beginning to grate with “middle America”, which had hoped to see an immediate upturn in their household budgets. Inflation has risen over the three months since Trump was elected, and the policies he has enacted since taking office are unlikely to bring prices down.

The dollar index reflected the market’s concerns in trading yesterday.

It fell to a low of 106.47 and closed at 106.55 as traders “voted with their feet” reflecting their concerns that a downturn could be on the way.

A rate cut is almost certain when the Governing Council of the ECB meets later this week. However, the certainty that the market felt that this would be a continuation of the ECB’s rush to deliver interest rates that are neither restricting nor stimulating the European economy may be ill-considered.

There is a significant hawkish element amongst Council Members who have been accepting of the need for the “interest rate gauge” to move close to neutral, if not accommodating, in recent months.

However, they harbour the feeling that inflation has not been defeated yet and injecting further stimulus may see it reawaken.

Even the German Central Bank, which one would expect to be at the forefront of dovish sentiment, has expressed its concerns that inflation could rise again.

With a possibly pivotal monetary policy meeting on the horizon, inflation in the entire region fell last month from 2.5% to 2.4%. While this will be welcome news, it is unlikely to drive a change in members’ decision-making going forward.

Inflation last month slowed from 2.5% in January but turned out to be higher than the 2.3% forecast by market analysts.

Core inflation, which excludes volatile energy, food, alcohol and tobacco prices and is a key indicator for the ECB, also slowed to 2.6% in February from 2.7% in January, in line with experts’ expectations.

The ECB has shifted its focus from fighting inflation to boosting the economy of the 20-member single currency area after sluggish growth over the past two years, but that view is changing, since it appears that members’ hawkish tendencies were hidden just below the surface and not abandoned entirely.

In the fourth quarter of last year, the eurozone economy grew by just 0.1%.

Inflation has fallen sharply from a record high of 10.6% reached in October 2022 after Russia’s invasion of Ukraine led to a sharp rise in energy prices.

But risks to the European economy remain after US President Donald Trump threatened the EU with higher tariffs and uncertainty over Ukraine’s future.

With confirmed hawk, Isabel Schnabel, revealing last week that she feels that rates have reached a neutral point already, the conversation will become less of a march towards lower rates and more of an obstacle course strewn with inflationary concerns.

The Euro reacted to renewed dollar weakness yesterday by rallying to a high of 1.0503 and closing at 1.0482. It still ran into strong selling interest above 1.05 which has capped any attempted rally thus far.

Have a great day!