Central bank update | Insight Investment

MARKET REVIEW

Bank of England (BoE): Despite three of the nine policymakers voting for a rate cut, the BoE kept rates unchanged at 4.75% during its December policy meeting. This decision came in response to an unexpected acceleration in wage growth. The year-on-year growth rate of average earnings, both including and excluding bonuses, rose to 5.2%, while employment growth remained steady. Inflation also rose at both headline and core levels, reaching 2.6% and 3.5% respectively, though these increases were largely anticipated. In other economic news, the Halifax House Price Index saw a year-on-year increase of 4.8% in November, marking its fastest growth since July 2022, as mortgage demand continued to improve. However, the initial report for Q3 GDP growth, which showed a meagre 0.1% quarter-on-quarter increase, was revised away completely. This revision indicates that the UK economy has only expanded in two of the past six quarters.

European Central Bank (ECB): Headline inflation in the eurozone edged up slightly, but this was anticipated and did not stop the ECB from easing policy again. Rates were cut by 25bp, bringing the deposit rate to 3.0%. In contrast to the US Fed, ECB policymakers became less hawkish, with President Christine Lagarde revealing that some had pushed for a 50bp cut. The euro weakened over the month, hitting its lowest level of the year against the USD, below $1.05. There was some positive economic news: the ZEW Economic Sentiment Index rose to 17, and the HCOB Composite PMI increased to 49.5, driven by an unexpected improvement in services. However, Q3 GDP growth was confirmed at just 0.2%. Political turbulence continued, with German Chancellor Scholz's government losing a no-confidence motion, leading to new elections in February. In France, Prime Minister Michel Barnier was ousted after failing to pass budget proposals.

US Federal Reserve (Fed): The Federal Open Market Committee proceeded with a 25bp rate cut, the third consecutive reduction, aligning with consensus forecasts. The committee’s projections suggest policymakers have become more hawkish, anticipating fewer and slower rate cuts, potentially as few as two in 2025. This shift in rhetoric pressured US stock prices and boosted the US dollar. Several economic data reports indicated improving conditions. The ISM Manufacturing PMI rebounded sharply in November, and job creation exceeded expectations after a weak previous month. Average hourly earnings growth remained well above both headline and core inflation at 2.7% and 3.3%, respectively. However, the Philadelphia Fed Manufacturing Index fell to -16.8 in December, its lowest level of 2024 and well below market expectations for an increase to +3. Consumer sentiment was mixed, with the University of Michigan survey showing a strong improvement in current conditions but a deterioration in expectations.

Figure 1: Central bank rates history and future market pricing

Source: Insight and Bloomberg. Data as at 31 December 2024.

Key interest rates and global data

Source: Insight and Bloomberg. Data as at 31 December 2024.

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