BoE set to cut rates again
It was reasonably quiet in FX markets yesterday. The euro and sterling pushed on further for a time against the dollar, getting up to highs of the day of around $1.0440 and $1.2550 respectively, but they have come back quite a bit since to trade at about $1.0370 and $1.2460 this morning. EURGBP has remained in a narrow range over the past few sessions and is currently trading at about £0.8320. The Bank of England announces its latest monetary policy decision at noon today. It is expected to cut interest rates by 25bps to 4.5% – which would be the third quarter-point reduction since August – and is likely to indicate that it will continue its gradual approach to lowering rates.
In bond markets, US yields fell further yesterday helped by some softer than expected (US) economic data, though that probably doesn’t help to fully explain the 10bps decline in 10-year yields. The latter have now fallen by circa 35bps (to just under 4.45%) over the past month or so, more than reversing the sharp spike higher that occurred during the first couple of weeks of January. UK 10-year yields also fell by 10bps yesterday, and they too have reversed the sharp move higher seen at the start of the year, declining by around 45bps (to just under 4.45% as well) in the intervening period.
The ISM index of activity in the services sector of the US economy unexpectedly fell back in January, albeit remaining in expansionary territory at 52.8 (above the key 50 threshold), pointing to some slowdown in the pace of growth at the start of 2025. Separately, the ADP jobs report showed private sector employment rose by 182k last month, following a gain of 176k in December. The official jobs (payrolls) report is published tomorrow.
In a speech yesterday, ECB Chief Economist, Philip Lane said that while Euro area inflation should decline to the 2% target in the coming months, “it is still important to take into account that this might take longer than expected and that new upside risks to inflation could emerge, including due to external developments”, hence it is appropriate to continue to take a step-by-step, meeting-by-meeting approach to lowering interest rates.
Looking to the day ahead, as noted, the Bank of England seems set to cut rates later, coinciding with the publication of its quarterly Monetary Policy Report which will contain updated growth and inflation projections. The latest forecasts will have been framed against a backdrop of subdued economic activity, gently rising unemployment, and a renewed decline in core inflation. This has contributed to a firming of rate cut expectations recently, with the market currently pricing in between three and four quarter-point reductions this year including today’s expected 25bps cut.