Markets
The Bank England as expected cut its policy rate by 25 bps to 3.75%. Despite the recent softening in inflation, the decision was made by the smallest of margins in a 5-4 vote. Governor Bailey was the swing voter to tilt the balance. In this respect, the message from the decision was a bit more ‘hawkish’ than some in the market anticipated. The BoE assesses that the risk from greater inflation persistence has become somewhat less pronounced, while the downside risk to medium term inflation from weaker demand remained. The central bank assesses that the restrictiveness of monetary policy had fallen as the Bank Rate had been progressively reduced, making judgements on further easing becoming a closer call. The minutes showed that members continued to place different weights on the main risks to inflation. However, even comments from some of the dissenters suggest that they also acknowledge the improvement in the disinflationary dynamics. The central bank overall concludes that the Bank Rate is likely to continue on a gradual downward path. In the wake of the decision, markets slightly delayed the timing a next cut (April no longer fully discounted). Still we see some room to err on the dovish side of expectations in case of milder inflation and labour market readings. UK ST bond yields are rising by up to 3 bps (2-y). The 30-y gilt yield eases 1 bp. Sterling again whipsawed/rebounded with EUR/GBP declining from the 0.8785 area to currently 0.875. The EUR/GBP 0.8720 area remains a strong support/resistance for sterling.
The ECB as expected left its deposit rate unchanged at 2%. The policy statement and the new staff forecasts brought few surprises. The ECB raised growth forecasts for the period 2025-2027 to 1.4%-1.2%-1.4% from 1.2%-1%-1.3% with 2028 growth projected at 1.4%. Also core inflation was slightly upwardly revised over the 2026-28 horizon (2.2 %-1.9%-and 2%) mainly as staff sees service inflation declining more slowly. Overall, the central bank still sees inflation stabilizing at the 2% target in the medium term. During the press conference Chair Lagarde maintained all optionality and didn’t give any guidance on the timing or even direction of a next step. The impact on EMU yields was limited. German Bund yields are changing less than 1 bp. After ceding some ground earlier in the session, EUR/USD rebounded back to the 1.174 area, mainly due to softer US CPI.
The BLS released US November CPI inflation data. Due to the government shutdown, the BLS was unable to collect October data and make M/M-comparisons. Still November inflation showed an unexpectedly sharp decline from September (headline 2.7% and core 2.6%, both from 3%). Even as some statistical issues might still be in play, the data should gave dovish oriented Fed members some comfort that there is room for follow-up easing in Q1 2026 especially if accompanied with soft labour market data. US yields today decline between 5 bps (5-y) and 3 bps (30-y).
News & Views
The Swedish Riksbank (RB) left its policy rate unchanged at 1.75% and strengthened the signal that is expected to remain at this level for some time to come. The forecast for the policy rate envisions a first rate hike by end 2027. Swedish inflation developed in line with the September forecast and approached the 2% target. The updated CPIF-path plots average core inflation rates of 2.7%-0.9%-1.7%-2.8% for the 2025-2028 period, virtually unchanged from September. In the meantime, growth has been higher and economic activity is assessed stronger. The situation in the labour market remains weak, but there are signs it is beginning to improve. RB raised its 2025-2027 growth path 1.5%-2.9%-2.5% with the first indication for 2028 at 1.2%. Swedish assets are unmoved with EUR/SEK at 10.90.
The Norges Bank (NB) held its key rate steady at 4%.While NB isn’t in a hurry to reduce it, projections still envision a lowering in the course of 2026 if the economy evolves as projected. The forecast is consistent with 1-2 rate cuts next year and a further reduction to somewhat above 3% towards the end of 2028. The assessment is little changed from September with a weaker krone (raising inflation expectations) and a little more spare capacity in the economy balancing each other out. The outlook for underlying inflation is virtually unchanged with CPI ATE expected to remain sticky, averaging 3.1% this year, 2.7% in 2026, 2.4% in 2027 and 2.2% in 2028. Mainland GDP forecasts for the 2025-2028 period stand at 1.6%-1.3%-1.3%-1.4% from 2%-1.5%-1.3%-1.3% in September. The Norwegian krone recovers part of this week’s (oil-induced) losses as the Norges bank remains reluctant to rapidly return to rate cuts. EUR/NOK falls back to 11.95 after testing 12 support earlier this week.
