Markets
The BoE cut its policy rate yesterday by 25 bps to 4.5% in a 7-2 vote (2 members in favour of 50 bps rate cut). BoE governor Bailey later warned not to read too much into this vote split as it is not a communication tool and as strategic considerations came into play for some members. New GDP and CPI forecasts point at a stagflation scenario with growth being significantly downwardly revised for this year (0.75% from 1.5%) while inflation is expected to peak again at higher levels (3.7% in Q3 2025). It prompted the BoE to take a “careful” (new addition) approach to further rate cuts. The prospect of more/longer interest rate support couldn’t help sterling given the bleak outlook. EUR/GBP extended this week’s rebound to close at 0.8351 from a start at 0.8318 with the downside in the pair looking (2024 low at 0.8223) ever more better protected.
US payrolls are today’s economic highlight. We assumed that data would lose some market moving potential after Fed members firmly played the extended rate pause card. This week’s outperformance of US Treasuries nevertheless shows that markets start contemplating (downside) risks to the US economy coming from president Trump’s trade/tariff politics. Especially given that the reaction function of the US’s trading partners clearly shifted compared with Trump’s previous term (retaliation, boycott,…). It suggests some asymmetric risks with markets more inclined to react to negative than positive surprises. US data released earlier this week (higher employment components ISM’s, strong ADP report, low jobless claims) don’t point in that direction though. Positive (European) risk sentiment yesterday failed to lift the euro’s spirits with EUR/USD ending close to unchanged below 1.04. The ECB releases a staff paper on the neutral rate estimate, upping the bottom from the current 1.75%-2.5%, which offers a new chance for the single currency to move somewhat higher. The Japanese yen’s outperformance is remarkable in this setting. USD/JPY fell from 152.61 to 151.41, extending Wednesday’s move on the back of higher earnings. They suggest more (and faster) policy normalization to come from the BoJ.
News & Views
The Reserve Bank of India (RBI) pivoted towards rate cuts this morning. After keeping rates steady for two years under former RBI governor Das, successor Malhotra delivered a first reduction from 6.5% to 6.25%. The unanimous decision was widely expected. The statement noted that “the existing growth-inflation dynamics, the MPC, while continuing with the neutral stance, felt that a less restrictive monetary policy is more appropriate at the current juncture.” First estimates showed that Indian economic growth slowed to a four-year low of 6.4% in the running fiscal year ending March 2025. Activity is expected to pick up to 6.7% in FY 2026 on household consumption and buoyancy in services export. Inflation eased from 5.5% to 5.2% in December, above the RBI 4% target. Annual inflation in current FY 2025 is seen at 4.8% before easing to 4.2% in the next. Risks to both growth and inflation are evenly balanced, the policy statement notes. The RBI offered itself all flexibility in terms of setting rates, saying it “will take a decision in each of its future meetings based on a fresh assessment of the economic outlook.” The Indian rupee trades a tad stronger against the US dollar around USD/INR 87.48 but remains near the all-time-lows.
The Czech National Bank (CNB) delivered a hawkish cut yesterday. Lowering the policy rate from 4% to 3.75% means it is approaching the 3.5% neutral rate fast. As restriction eases and some longer-term inflationary risks persist, the central bank will approach further monetary easing “with great caution”. The statement noted that policy could remain slightly restrictive for longer than expected in the baseline scenario – which assumes a further decline in interest rates through mid-2025 before stabilizing afterwards. New inflation forecasts show 2.4% for this year and 2.1% for 2026. The CNB noted, however, that yesterday’s higher-than-expected January flash CPI release already implies upside risks to this year’s forecast. Other risks include food and services (due to elevated wage growth) price inertia & higher public spending. The CNB has not offered a clear view on the impact of the new US administration though, saying only that it represents a source of uncertainty. Growth forecasts were lowered from 2.4% to 2% this year and kept unchanged at 2.4% for 2026. The Czech crown strengthened to EUR/CZK 25.08 yesterday. The currency remains trapped within a narrow sideways trading range which the CNB does not expect to change materially anytime soon: EUR/CZK is seen at 25.2 and 25.4 on average for this year and the next.
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