08 February 2025
by Tony Redondo
As widely expected, the BoE (Bank of England) cut interest rates for the third time in six months last week by 0.25% to 4.5% and confirmed flat economic growth up until the end of 2024. The BoE then went ‘off script’ with a new forecast for inflation of 3.7% (a big increase on the previous forecast of 2.8%) and slashed by half the 2025 economic growth forecast from 1.5% to 0.75%. The miserable growth forecast should encourage further interest rate cuts to stimulate the UK economy, but the higher-than-expected inflation outlook could well curtail such action.
The MPC (Monetary Policy Committee) 7-2 vote split also caught the financial markets off guard and triggered an across-the-board selloff in the Pound. The vote split suggests the MPC is increasingly concerned with weakness in the economy, meaning they are willing, at least for now to look past the anticipated resurgence in inflation.
This Thursday’s UK GDP figures and next week’s UK inflation data will be closely watched by analysts to see if the BoE has any room for manoeuvre to cut interest rates at their next meeting on 20 March.
BoE Governor Andrew Bailey warned the Uk’s bloated public sector is damaging the economy. Bailey said an increase of half a million workers in the public sector since lockdown had not been matched by a rise in productivity.
Some analysts see the BoE’s forecasts showing the UK sliding towards “stagflation”, a toxic combination of weak growth and high inflation which brings the worst of all worlds on an economy. Susannah Streeter, the head of money and markets at Hargreaves Landsdown said “The risks of stagflation are stark. Inflation remains above the Bank’s 2% target and price pressures are piling up, but the economy is stagnating, and business confidence has taken a knock.”
Currency Exchange Rates Update
Volatility continues to reign in the currency markets.
The Pound fell heavily against all of its major currency peers on Thursday but still ended the week nearly 0.5% up against the Euro. A different story against the all-powerful US Dollar where the Pound fell over 1% on the BoE announcement and also recorded similar falls against the Australian and Canadian Dollars.
What’s in the news?
UK
Reform UK topped a major national opinion poll for the first time with 25% of the vote share according to the YouGov survey with Labour in second with 24% and the Tories on 21%. Almost one in four Conservative voters at the last election now back Reform while 40% of those who supported Labour in July would not do so again.
Good news
The Halifax house price index surged to a record high a day after the latest BoE interest rate cut with a 0.7% rise in January to an average of £299,138.
Not so good news
The OBR (Office for Budget Responsibility) made its first assessment of the UK economy ahead of the Spring Statement on 26 March amid mounting claims that Chancellor Rachel Reeves will need to announce emergency measures to balance the books.
Leading UK economic forecaster EY Item Club cut its UK GDP growth forecast from 1.5% to 1%.Matt Swannell, chief economic adviser to the EY Item Club said “A weaker-than-expected finish to 2024 left the UK economy with a greater hill to climb to achieve moderate growth this year, and GDP will likely struggle to accelerate beyond one per cent in 2025. Nonetheless, the slowdown at the end of last year is expected to be temporary and the UK should see steady quarter-on-quarter growth throughout 2025”.
Investment Bank Morgan Stanley also slashed its growth forecast for the UK in 2025 from 1.3% to 0.9%.
The CBI (Confederation of British Industry) warned that British businesses are braced for a “significant fall” in trading and there is now “widespread pessimism”.
The IoD (Institute of Directors) said business confidence remained at “historically depressed levels” in January. Anna Leach, chief economist at the IoD said “Confidence remains close to its Covid lows. It is clear that companies continue to be challenged by the breadth and scale of cost increases announced at the Budget, and this risks undermining both the investment needed to drive growth and the sustainability of the public finances”.
S&P’s PMI (Purchasing Managers’ Index) for the UK manufacturing sector showed input price increases rose at their fastest pace in two years in January. Alongside the rising cost pressures, the PMI showed that the manufacturing sector remained in contraction in January. Firms also cut staff at the fastest pace in almost a year due to the extra costs, while business optimism remained near its lowest level in two years.
S&P Global’s UK Construction Purchasing Managers Index also recorded a sharp fall in UK construction activity with housebuilding activity falling for a fourth straight month as confidence plunges. The reduced workloads combined with concerns about the economic outlook of the UK as a whole, led to a fall in business activity expectations to its lowest for 15 months. New orders also decreased at the fastest pace since November 2023.
Council tax bills in 21 areas will top £2,500 when they increase in April with Deputy PM Angela Rayner going further by giving permission for six local authorities that are struggling financially to raise bills beyond the “maximum” 5% and over 5 million people will be subject to council tax rises in areas where local elections have been cancelled.
Energy Secretary Ed Miliband’s decision to spend £22bn on “unproven” carbon capture technology is a high risk “gamble” that will add £800 to bills, MPs on the Commons Public Accounts Committee warned saying the technology had never been tested, was likely to prove very expensive and may not work.
USA
White House press secretary Karoline Leavitt said Trump will be implementing 25% tariffs on Mexico and Canada as well as a 10% duty on China, in retaliation for “the illegal fentanyl that they have sourced and allowed to distribute into our country.” Within days, Claudia Sheinbaum, the Mexican president announced, “We had a good conversation with President Trump with great respect for our relationship and sovereignty; we reached a series of agreements”. President Trump confirmed that the tariffs on Mexico have been suspended for at least a month after President Sheinbaum agreed to deploy 10,000 Mexican troops to her northern border with the US, tasked in Trump’s words with “stopping the flow of fentanyl and illegal migrants into our country.”
Mexico’s capitulation to Trump’s demands follows a similar deal hammered out with Colombia in the previous week when President Petro declared his country would not accept US flights returning deported migrants. In response, Trump threatened immediate tariffs and within a matter of hours Colombia was sending its own planes to bring the migrants back.
Canada initially retaliated by imposing £90bn worth of its own tariffs on US goods and, for good measure, cancelling orders from US firms including Elon Musk’s Starlink. But the Canadian government has since announced that it, too, would be sending thousands of troops to the border as part of a multi-billion-dollar effort to prevent the crossing of illegal narcotics, winning their own reprieve and delaying the tariffs Trump had threatened to impose.
President Trump also announced that tariffs on Europe will also “definitely happen”. The University of Michigan’s consumer sentiment index showed a fall in February.
The NFP (Non-farm payroll) jobs report for January showed a fall in the unemployment rate to 4% and that average hourly earnings for January were higher than expected.
The Prime Minister of Denmark, Mette Frederiksen announced she is ready to allow the US to boost its presence in Greenland. The territory already hosts an American military base that monitors space and detects missile threats, and the US “can have more possibilities” according to Frederiksen.
The EU
Oxford Economics reported that Germany’s automotive industry will be the biggest loser by far if Europe is dragged into a trade war. Should the US and the EU hit each other with 25% tariffs, the consultancy estimates that German car exports to the US will drop by 7%. Only Italy comes close, with a forecast drop of 6.1% in car exports to the US. France and Spain would be far less affected with drops of 1.7% and 1.9% respectively.
Eurostat, the Euro zone statistics agency reported that Euro zone inflation rose more-than-expected to 2.5% in January with energy costs accelerating sharply, jumping 1.8% from a year earlier in January compared to a 0.1% rise in the previous month.
French Prime Minister François Bayrou forced the adoption of a 2025 budget bill by bypassing the lower house of parliament using a constitutional provision that will likely trigger a no-confidence vote.
Others
China hit back against Donald Trump with counter tariffs targeting the US energy sector with a 15% tariff on coal and liquified natural gas products, as well as a 10% tariff on crude oil, agricultural machinery and large displacement cars.
The RBI (Reserve Bank of India) cut its key interest rate for the first time in nearly five years, as cooling inflation has offered room to stimulate the slowing economy and upgraded its economic growth forecasts for next fiscal year to 6.7% and an inflation rate of 4.2%.
Using a mixture of strong exports, robust domestic consumption, a favourable business environment and a commitment to economic stability, Poland’s economy is forecast to grow by 3.5% in 2025 and 3.3% in 2026.
Russia’s real inflation rate has surged by more than 700% since Vladimir Putin came to power according to a new analysis by economic experts for the Rossiskaya Gazeta. The analysis was carried out using data from Rosstat, the Kremlin’s own statistics agency. Officially, inflation is hovering at around 9.5%. Russia’s Central Bank has raised interest rates to a record 21% in a bid to bring inflation down. However, ordinary Russians are experiencing price inflation that far outstrips the official rate many times over on basic food items. For example, the price of potatoes has gone up by more than 70% in the last year while butter has risen by around 30%.
Stranger than fiction
In the ‘Alice Through the Looking Glass’ World of the UK government, UK Energy Minister Ed Miliband is pursuing a clean energy policy of not extracting gas from the UK’s own North Sea fields but instead importing LNG from abroad from countries that are far from zealous in pursuing clean energy. Then, add the transport costs and carbon footprint to get the LNG to the UK. Apart from the attraction of reducing its carbon footprint, the UK could be energy self-sufficient and have its own much cheaper energy with an added bonus of UK jobs and the accompanying investment that are foregone plus the transfer of wealth to the countries exporting their LNG to the UK.
In the same vein, PM Keir Starmer has handed prisoners a 6.6% pay rise at a cost of £4.4 million despite depriving 10 million pensioners of their winter fuel allowance because money is so tight.
Quote
Edmund Burke, Anglo-Irish statesman and philosopher “Hypocrisy can afford to be magnificent in its promises, for never intending to go beyond promise, it costs nothing”.
