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11 Feb 2025 | 3 minutes to read
Weaker growth and higher-than-expected inflation expectations led the Bank of England (BoE) to cut its base rate by 0.25% to 4.5% last week. It slashed its 2025 growth forecast to 0.75% from the 1.5% it predicted in November and forecast inflation may hit 3.7% by the autumn – close to double its 2% target. Governor Andrew Bailey suggested that spiking inflation will be a “bump in the road” without any “lasting effect”. Market-watchers foresaw the rate cut but the vote was more dovish than expected with two of the nine Monetary Policy Committee (MPC) members voting for a -0.5% reduction and 7 for -0.25%. Sterling initially slipped sharply lower against the US dollar before recovering.
Business and consumer confidence have been febrile since Chancellor Reeves’ October Budget - arguably contributing to the BoE’s revised forecasts. However, external factors such as higher wholesale energy prices and anxiety over potential US trade policies may be at play too. Although the BoE noted that “greater global protectionism would be likely to have a negative impact on world economic activity in the medium term, and lead to increased trade fragmentation”, weaker growth and a deteriorating jobs market could ultimately lower inflation to around its 2% target by the end of 2027. Lower forecast growth will concern Reeves and the Treasury on various fronts, but lower interest rates will alleviate the pressure on public finances.
Mixed US jobs data last week and policy uncertainty will likely encourage the US Federal Reserve (Fed) to hold fire on interest rate cuts. Non-farm payrolls data showed the economy added 143,000 jobs in January, 32,000 less than expected, possibly distorted by California’s wildfires.
While hourly earnings rose +0.5% m/m (+4.1% y/y), contributing to more persistent inflation, longer-term trends shifted downward and indicated a cooling, albeit still solid, labour market. The December Job Openings and Labor Turnover Survey (JOLTS) indicated 1.1 job openings for each unemployed person, down from 1.15 in November. Weekly jobless claims rose by 11,000 to 219,000 for the week ending 1 February. Hiring momentum continued from Q4 2024, except for the manufacturing sector.
Investors continued to struggle to discern between President Trump’s rhetoric and reality last week.
His threat to implement a 25% tariff on goods from Canada and Mexico was later delayed for a month after ‘constructive’ calls with Canada’s Prime Minister Justin Trudeau and Mexico’s President Claudia Sheinbaum who agreed to increase their military border presence to variously combat illegal migration, firearms and drugs. Then Trump announced a 25% import tax on all steel and aluminium entering the US, potentially hitting two of its biggest steel trading partners - Canada and Mexico. Trump also announced a 10% tariff on all goods imported from China which took effect last week. Beijing retaliated with 15% tariffs on coal and liquefied natural gas and 10% on crude oil and agricultural machinery. The dollar strengthened on the latest escalation of Trump’s policies and his suggestion that further tariffs will be implemented this week.
Notably, the University of Michigan’s Consumer Sentiment Index fell in line with expectations. However, households expect inflation to surge to 4.3% over the next year, partly due to the ongoing threat of Trump’s trade tariffs. One of Trump’s big election promises was to bring down inflation for the average American.
Gold’s continued rally last week led it to a new all-time high in dollar terms of around $2,904 per ounce. Gold has gained ~10% since the start of 2025. Investors view gold as ‘safe haven’ asset as President Trump’s tariffs – actual and proposed – cause heightened geo-political risk.
Additionally, economists report that the People’s Bank of China (PBOC) continues to massively invest in gold, increasing its reserves to diversify its exposure to traditional currencies (with the US dollar being the main target). Many other emerging countries are keen to secure their assets in the face of possible market turbulence.
Finally, US Treasury Secretary Bessent stated that the US government wanted to create a Sovereign Wealth Fund by ‘monetising the asset-side of the US balance sheet for the American people’. The US government holds approximately 8,123 tonnes of gold priced at $42 per ounce on its balance sheet. If revalued at $3,000 per ounce, the government could declare a current value of over $800bn. This financial manoeuvre would not only deleverage the US balance sheet but would likely push the price of gold further upward.y
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