BOE CUTS RATES AS IT CONFIRMS LOW GROWTH IS MORE CONCERNING THAN RISING INFLATION

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Data Sourced from FE Analytics, and Bloomberg Finance LP

BOE CUTS RATES AS IT CONFIRMS LOW GROWTH IS MORE CONCERNING THAN RISING INFLATION

This week the Bank of England cut interest rates as expected, but surprised markets with its gloomy outlook as its forecast of 0.75% growth would be lower than the measly growth seen in 2024. The BoE expects price rises in areas like domestic energy and water bills to lift inflation up towards 4% this year. But its view that any acceleration will be temporary opens to door to more aggressive rate cuts this year. If the bank’s forecast is correct this should be supportive of government bond prices and could see further weakness in the pound.

Meanwhile, investors risk indigestion trying to digest the volume of news from the other side of the Atlantic. The sum of this week’s tariffs announcements is not much has changed. The potential for tariffs has driven the dollar up in recent months. But despite high levels of volatility, the Mexican peso and Canadian dollar have both gained slightly against the dollar this week. This pattern is likely to continue in markets more generally, as a rapidly moving news cycle drives short-term price movements which may obscure the longer-term trend.

RATES: BANK OF ENGLAND CUTS RATES AND WARNS OF WEAK GROWTH

The Bank of England cut interest rates but it warned of slower economic growth this year. The quarter point cut brings the Bank’s main rate to 4.5% and this was widely expected by markets. However, the forecast was far gloomier than anticipated and two of the nine-person committee voted for a 0.5% cut. The BoE said it expects GDP to grow by just 0.75% in 2025. The bank expects inflation to rise to around 3.7% this year before falling back to target and this allowed it to make interest rates less restrictive. This caused gilt yields to fall as markets now expect more aggressive rate cuts this year and the pound fell against the dollar and the euro.

The rate cut from the BoE means the UK has joined Europe in diverging from US interest rate policy. There is similar divergence in manufacturing activity, as the Eurozone remains weak while the US has seen sentiment turn more positive. However, services sectors in Europe, the UK and the US are all slowing and are seeing more modest growth rates.

GLOBAL TRADE: MARKETS SENT ON A ROUND TRIP BY TRUMP’S TARIFFS

US tariffs took markets on a roller coaster ride this week. On Saturday, Donald Trump announced 25% tariffs on goods from Mexico and Canada and 10% additional tariffs on Chinese goods effective on Tuesday. The US dollar surged as much as 1.4% against a basket of currencies and the Canadian dollar hit its lowest level since 2003. Equities sold off globally as markets opened on Monday. However, most of these movements were reversed as negotiations with Mexico and Canada meant tariffs were suspended. China struck back with tariffs on US fossil fuels and farm equipment, more export restrictions on rare materials and opened an antitrust probe into Google.

Trump also said Britain’s trade with the US is “way out of line”, though a deal could be worked out easily. However, he warned the EU is “really really out of line,” and threatened additional tariffs. The EU is planning further probes of US big tech firms as it prepares to push back should tariffs be levied against the bloc.

EQUITIES: PHARMACEUTICALS RISE ON SALES GROWTH

The pharmaceutical sector has benefited from positive company updates. Novo Nordisk reported a 26% rise in net sales to $40bn in 2024, driven by high demand for obesity and diabetes drugs, particularly in the US. Shares climbed 4.6% as it promised rising profits above expectations, despite slowing sales. GSK’s shares jumped 6% as it reported sales rose 7% to £31bn in 2024, led by a 19% rise in specialty medicines, including a doubling of cancer drug sales. GSK also launched a £2bn share buyback as it raised its growth targets. AstraZeneca posted an 18% revenue increase in Q4 2024, reaching $14.9bn, despite lower China sales. The company’s shares rose 4% following the results.

Merck diverged from its European rivals as its shares fell 11% after reporting it had halted shipments of its blockbuster vaccine to China. Its profits in Q4 were better than expected but it reduced its revenue forecast for 2025. The UK pharmaceutical sector has lagged the broader index over the past year, but outperformed the FTSE in recent weeks.

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