7 February 2025: Reeves is besieged by downgrades for the economy

The Bank of England lowered the base rate by twenty-five basis points to 4.50%. At his press conference following the announcement, the Bank’s Governor Andrew Bailey told reporters that the Bank has also lowered its forecast for growth during 2025 from 1.50% to just 0.75%.

Seven members of the Bank’s Monetary Policy Committee backed the decision, while two, Swati Dhingra and Catherine Mann, voted for a larger 50 basis point cut.

This was a significant turnaround from Catherine Mann, who has always erred on the side of caution, voting against the two hikes that have happened so far in the current cycle.

Another surprise was that, despite making dovish comments recently, the Committee’s newest members. Alan Taylor “only” voted for a twenty-five-point cut.

Prime Minister Sir Keir Starmer welcomes interest rates to be cut to 4.5%. He said the Labour government “were never going to turn around the economy in just six or seven months.” However, the news that the Bank had also slashed its forecast for growth would have been less welcome. Starmer appears to take the entirety of this Parliament to economically place the country on a solid base, despite his Chancellor appearing impatient to drive the economy forward.

The Office for National Statistics delivered its forecast for economic growth this year to Rachel Reeves on Wednesday evening, so far there has been no announcement about their prediction, although it is unlikely to be positive.

During interviews following his press conference, Bailey commented that employment costs following the announcements made in the budget last October, have seen business confidence fall, which formed a significant part of the growth prediction.

Businesses see far less opportunity to invest in their staff levels when the costs attached will be higher from April.

The Bank predicted that inflation would average 3.7% this year, which is bigger than its previous estimate,

Bailey did not want to use the word but with inflation unlikely to fall as fast as had been previously predicted and growth having been described as “putrid”, it seems that the country may be looking at a period of stagflation.

Despite the lower rate of deflation, Bailey told reporters that he believes that the country is now on a path towards lower interest rates, but how fast and how fast they will fall is subject to several considerations.

The pound staggered, then recovered following the announcement.

It reached a low of 1.2360 but recovered to close at 1.2440.

Today’s publication of the January employment report is being treated casually by the market which has been close to overwhelmed in the past weeks by President Trump’s pronouncements on topics ranging from tariffs on U.S. Imports to Middle East peace.

One common thread that his ideas have brought is a rise in the level of outrage felt by several nations around the world.

No one should be particularly surprised since Trump has used the message that he is going to “Make America Great Again” before he even decided to run for election again.

His pronouncements range from the bizarre to the downright outrageous. The BBC’s Middle East correspondent said yesterday that Trump’s plan to turn Gaza into a “Middle East Riviera” will never come to fruition, but just the fact he said it, will have a significant effect on the entire peace process.

Today, the Employment Report is expected to see around 170k new jobs created in January, down from 256k in December. Several factors could contribute to the figure being lower than predicted, including the weather which was unseasonably cold even for the U.S., in January.

However, the general feeling of sanguinity with which the data is being treated could backfire on the market. It is generally believed by those most bearish about the economy that the downturn will start with a significant fall in job creation. This is not the market’s prime expectation, but it warrants consideration.

Fed Vice Chair Philip Jefferson reaffirmed the cautious approach to policy easing, saying that while a “gradual reduction” in monetary policy restraint towards neutral remains the most likely scenario, there is no urgency to change the current stance.

“I do not think we need to be in a hurry to change our stance,” he said in a speech overnight.

He emphasized that policy decisions will continue to be guided by incoming data and the evolving economic outlook, noting that monetary policy is “not on a preset course.”

Jefferson outlined a “range of scenarios” for future policy moves. If economic activity is still robust and inflation does not sustainably decline toward the 2% target, the Fed could maintain its restrictive stance for longer. Conversely, if the labour market weakens unexpectedly or inflation cools faster than expected, the central bank may need to ease policy at a quicker pace.

Meanwhile, San Francisco Fed President Mary Daly echoed Jefferson’s sentiment, describing the US economy as “in a very good place.” She emphasized that the Central Bank is in a strong position to “wait and see” before making any policy moves.

The dollar index is continuing to be driven by White House comments. It is likely to remain volatile for several months to come. Yesterday, it rallied to a high of 108.10 but fell back to close at 107.70.

The ECB appears on the verge of throwing the market a “curveball” by announcing what it considered to be the “natural” rate for interest rates in the Eurozone. Several market practitioners have been considering where rates are headed since the Central Bank began to cut rates during its current cycle.

Fresh estimates for the neutral rate, a theoretical level that neither limits nor spurs demand in the economy, will be published later this morning. ECB President Christine Lagarde has said she and her colleagues “will operate on the basis” of the paper to help figure out “what our monetary-policy stance should be.”

The release is arriving as talks intensify over where borrowing costs will settle after five cuts in the deposit rate, to 2.75%. With inflation on course for 2% this year, officials agree that more reductions are coming, particularly with the region’s economy flat-lined. But where precisely the sweet spot lies is proving controversial.

Lagarde herself has put the range for neutral at 1.75% to 2.25%, this week’s research may offer further clarity on the ECB’s landing zone, although she has no scientific base for her assumption.

The debate in the Governing Council about the neutral interest rate is gaining traction,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which collates the monthly PMI statistics. “While the concept itself is only of limited use in determining monetary policy, it can be used well to manage expectations, and in this respect, we will look closely at what is coming next.”

Spanish newspaper El Economista has described the “Iberian miracle” which has saved Europe from recession – so far.

With the economies of France and Germany in the doldrums, Spain and Portugal were responsible for 50% of the eurozone’s growth in the last quarter.

It’s a surprise that is intriguing economists. But according to investment bank J.P. Morgan, the dynamic is not sustainable: unless Germany and France start recovering, Europe is heading for recession.

Never before has the Iberian Peninsula been so important in keeping the euro economy afloat. Between them, Spain and Portugal account for just 13% of the eurozone’s GDP, but if the two nations were excluded from the last quarter’s analysis, the eurozone’s growth would already have dipped into negative territory. Annual growth would have halved.

ECB Chief Economist, Philip Lane, has suggested that the bank needs to maintain flexibility in its monetary policy due to the continued risk of inflation in both directions.

Lane expressed confidence that consumer price increases would stabilize at 2% this year.

However, he cautioned that reaching this target might take longer than initially predicted. If the bank was overly cautious, a dynamic of inflation below the target could potentially become established, Lane warned.

The euro fell to a low of 1.0352 yesterday and closed at 1.0389.

Euro parity with the dollar once seemed like an outside bet, now it looks like an inevitability. Traders are rewriting their predictions for the common currency after US President Donald Trump said tariffs on the European Union will “definitely happen,” having made good on threats to impose levies on imports from Canada, Mexico and China.

There are still more fireworks to come from the new U.S. administration, while the single currency continues to seek some solace and is struggling to find any.

Have a great day!