Thoughts

January 31, 2025 | 14:20

Central Banks: Some Clarity… Please!

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

We are done. Maybe. Hm... not sure. We will get back to you.

It may not be so simple, but that is likely the thinking behind almost all central bankers these days. On one hand, they’re trying to balance growth and inflation and the labour market… fulfilling their mandates. On the other hand, there is the chance that the country will be hit with tariffs (rates to be determined), on some products or all products and maybe services. The threat is real. And the uncertainty, the “complication” (to borrow a word from ECB President Lagarde), makes the already difficult job even more difficult. Plus, financial markets’ view on what will play out on the rate front may be quite different from what central bankers had in mind.

Take the ECB for instance. The Governing Council was very dovish at the end of 2024 when it doled out its fourth 25 bp rate cut, and even debated a 50 bp’er. The central bank then started 2025 with an as-expected 25 bp cut—but emphasis on the downside risks to growth, how the economy was expected to “remain weak in the near term”, and that the disinflation process was “well on track”, threw support behind the view of more rate cuts to come. Indeed, BMO has had 100 bps pencilled in for some time. But there is no clarity around the tariffs: if and when they will happen. And Pres. Lagarde said that it was not as simple as saying tariffs were deflationary or inflationary: it depends on factors such as the re-routing of trade and retaliation. But “it will have a global negative impact”. So there is a big question mark around that; plus, she pointed out that service sector CPI was still “resisting”. The kicker, though, came after the ECB’s Press Conference when Reuters’ sources stated that the Governing Council will likely cut rates again in March; but after that, they need to have a “broader, deeper debate”. In other words, they may move to the sidelines. Then Bloomberg’s source said that the ECB may drop the reference to policy being “restrictive” at the March meeting, which would also suggest a pause. Finland’s Olli Rehn also said as much on Friday. It truly will be decided on a meeting-by-meeting basis. Meantime, we are comfortable with our call for three more cuts: March, June and September. For now.

The BoE is meeting next week, and it is expected to take its Bank Rate down 25 bps to 4.50%. The last meeting in December was a dovish hold, with a 6-to-3 vote to do so. The fact that three turtledoves wanted a cut was a surprise; and since that meeting, the data have pushed for further easing. For example, the latest PMI survey showed that firms have been “cutting employment amid falling sales and concerns about business prospects”. Consumer confidence is sitting at a one-year low. And, the latest BRC survey showed that nearly half of the country expects the economy to worsen in the next three months. Meantime, retailers were getting hit with a record amount of crime. Real GDP has stagnated so far in the three months to November. At least the December inflation reading was benign, which gives the BoE another reason to ease, not that it needs it. Fortunately, the massive bond selloff that saw 10-year gilt yields hit nearly 17-year highs has cooled off. But how the Bank proceeds after February’s meeting is unclear. It will depend on 1) whether the U.K. is hit with U.S. tariffs, and 2) the U.K. Treasury. Chancellor Reeves has heard enough complaints from the business community about the budget and finally said that, “if needed”, she will revise the budget on March 26. What those revisions are will help shape BoE’s thinking. Meantime, we will wait (impatiently).