5 February 2025: Two cuts and nothing in H2 is the new forecast

There have been very few comments by members of the Bank of England’s Monetary Policy Committee since its last meeting, and this has led to speculation being rife as economists, commentators and analysts put forward their own predictions that have led the market to be confused about what will happen at tomorrow’s meeting and in the future.

A rate cut tomorrow appears to be eminently possible, although this year’s total number of cuts feels like a “moveable feast”.

The base rate will be lower at the end of the year, but whether that results from two or four cuts, and if those cuts will each be of twenty-five basis points, is a matter of conjecture.

Furthermore, it is possible that as the economy recovers, driven by increased public spending and a loosening of public spending there could be only two rate cuts over the year, including one tomorrow.

According to the Chief Statistician at the Office for National Statistics, the number of people who are “economically inactive” has risen considerably since the end of the Pandemic. According to Sir Ian Diamond, the number of people either not in work or actively looking for work has risen to 2.8 million.

MPs have often been critical of the employment data that the ONS delivers, but Diamond insists that the data is accurate. The rise in inactivity, which is unique among G7 nations, is a significant drag on the economy. First, those not working do not contribute to the tax revenue, while they often receive benefits, diluting the total revenue available to the Treasury.

Britain’s tax and spending watchdog is preparing to slash its crucial growth forecast and pressure Rachel Reeves to cut spending or raise taxes within weeks.

Reeves has bemoaned the fact that she has had to deal with the supposed “black hole” in the country’s finances since taking over as Chancellor, which has hampered her delivering on her pledge to increase growth levels.

The Office for Budget Responsibility (OBR) has presented the Chancellor with its first assessment of the economy ahead of the Spring Statement on March 26, amid mounting claims that Ms Reeves will need to announce emergency measures to balance the books.

Commentators have warned that the OBR will almost certainly downgrade its forecast for 2025 since the economy has ground to a halt during Labour’s first six months in power.

The giant fast-food chain McDonald’s, which prides itself on only using British and Irish beef in its products, is being urged to join the campaign for Reeves to reverse changes to inheritance tax in another blow to Reeves’ credibility.

Most of Britain’s major supermarkets have now publicly come out against the inheritance tax as the Government’s popularity continues to wane.

The Prime Minister’s popularity rating is now below that of Rishi Sunak at its nadir.

The pound has continued to recover as President Trump continues to make economic policy seemingly on a whim. Having delayed the introduction of tariffs on Mexican and Canadian imports, after he managed to obtain concessions from them, China has announced its plans for retaliation.

The UK and EU are still waiting for Trump to turn his attention to them, although it is expected that the UK may escape the worst of the sanctions, which may not be too onerous and subject to negotiation.

Sterling rallied to a high of 1.2493 yesterday and closed at 1.2488.

The Fed is becoming more concerned about the effect of President Trump’s “flagship” policy of subjecting tariffs on the goods imported into the U.S. from some of America’s largest trading partners.

Several members of the FOMC have spoken of their preference to “wait and see” before considering their attitude to the inflationary effect of Trump’s actions, which are considered fluid at best.

Having announced tariffs on imports from Mexico and Canada to start on Saturday, Trump allowed both a one-month grace period as they announced concessions around illegal imports of Fentanyl and undocumented immigration.

China is “making noises” about its reaction to tariffs, but it is yet to announce exactly what it will do, although it is likely it will announce tariffs of its own, most probably linked to the energy sector.

Trump trade adviser Peter Navarro has defended the President’s plans to create a new agency to collect tariff income, doubling down on a controversial plan that has spurred unease even among some of President Donald Trump’s Republican allies.

“If President Trump succeeds like he wants to succeed, we are going to structurally shift the American economy from one over-reliant on income taxes and the Internal Revenue Service to one which is also reliant on tariff revenue and the External Revenue Service,” Navarro said in an interview.

Trump promised shortly before being sworn into his second term that he would create a new “External Revenue Service” on his first day in office to collect those tariff payments. Ultimately, Trump signed an executive order asking officials to study the feasibility of creating such an agency.

The Federal Reserve is battling four challenges at once. First, it faces the usual job of keeping inflation low while also avoiding a recession, although a recession is not considered likely by most economists.

Second, President Trump is demanding that the Fed reduce interest rates, complicating that first task. Third, it must decide how to respond to Trump’s policies, especially on trade and immigration, and finally, the Central Bank is once again reviewing its monetary policy, just five years after changes that some considered a failure.

Jerome Powell is keeping a low profile as several of his regional colleagues confirm that they are concerned about the inflationary effects of Trump’s policies. He (Powell) prefers to concentrate on the Fed’s primary goals of price stability and maximum employment while avoiding questions about Government policy.

The dollar continued to slide as Trump continued to drive markets, changing his decisions on tariffs almost before the ink was dry on his previous executive order.

It fell to a low of 107.92 yesterday and closed at 108.00.

Throughout most of last year, members of the ECB’s Governing Council expressed their concerns about rising inflation, with an almost total disregard for any downturn their policies were creating for an economy which teetered on the edge of a recession.

Even the Governors of two of the most affected Central Banks, The Bundesbank and Banque de France, appeared to be “on board” with keeping monetary policy restrictive as their economies weakened for a variety of reasons, including the level of interest rates.

Now, it seems that the dark clouds of inflation have cleared, and the sun is shining on an ECB which sees loosening monetary policy as its primary objective.

Having cut rates again last week, market sentiment is for cuts to continue for the rest of the first half of the year.

Trade tariffs imposed by U.S. President Donald Trump will increase economic uncertainty, French Central Bank Governor Francois Villeroy de Galhau said on Monday.

“Looking at the economic news, there are some rather positive elements. For Example, there is a recovery of purchasing power. However, the decision of President Trump to impose strong tariffs will increase economic uncertainty,” Villeroy told France Info, adding that this was a very worrying development.

Villeroy, who is also a member of the ECB Executive Board, said Trump’s tariffs were “very brutal” and would hit the autos sector especially.

“Everybody loses in this kind of protectionist trade war,” he said.

Asked whether the European Union should respond in kind if Trump hit the EU with tariffs, Villeroy said such a response should not be excluded, but he urged caution.

“The key is to make our economy stronger,” he said.

Growing the economy is now a central pillar of the ECB’s strategy. Villeroy believes that the Central Bank is correct to provide guidance that its goal is to loosen monetary policy bringing it to at least neutral where it is neither restricting nor encouraging the economy, or possibly even further.

Slovak Central Bank Governor Peter Kazimir said earlier this week: “The overall situation in the Eurozone is still one of general anti-inflation. This will allow the European Central Bank to continue cutting rates this year, and we expect a total cut of 100 basis points.” “Our approach is clear. Maintain stability, adjust, when necessary, with a focus on keeping the economy on track.”

With the Federal Reserve withdrawing from a Central Bank climate coalition and the political tide turning away from green policies in the U.S., the ECB has no intention of turning its back on green initiatives, according to the Head of its climate centre.

The euro recovered yesterday as President Trump didn’t yet follow through on his threat to impose tariffs on the Eurozone.

It rallied to a high of 1.0387 and closed at 1.0385.

Have a great day!