29 January 2025: Lloyds CEO expects three rate cuts in 2025

There is considerable disagreement about how many rate cuts the Bank of England will perform during the current cycle. Andrew Bailey has acknowledged that his colleagues on the MPC feel able to support the economy, even as considerable discussion is taking place about whether they will cut rates at their upcoming meeting.

Lloyds Banking Group chief executive Charlie Nunn anticipates three base rate cuts this year, as he characterised the UK as a “resilient” but slow-growing economy.

However, U.S. investment Bank Goldman Sachs has recently published a note to investors in which they comment that interest rate cuts may well go on for longer than expected and end with the base rate 150 basis points lower due to six cuts in the next eighteen months.

Most commentators believe that the rate cuts will be a “natural consequence” of inflation having fallen as the secondary effect of the stimulus in the aftermath of the Pandemic fades.

Markets are already factoring in two cuts this year. Many economists predict that the Bank will opt for a twenty-five basis-point reduction at its forthcoming meeting next week, kicking off what could become a steady pace of quarterly cuts through 2025. The Monetary Policy Committee lowered rates twice last year, moving from 5.25 per cent to 4.75 per cent, against a backdrop of faltering growth.

Goldman’s economists argue that markets are “pricing too few rate cuts,” predicting that sluggish demand and softer inflation will prompt a more decisive loosening.

Lower-than-expected GDP figures bolster this view, November’s growth was only 0.1 per cent, and a sharp drop in services inflation to 4.4 per cent last month. Private sector surveys also show the labour market weakening, with unemployment at 4.4 per cent and job vacancies down to levels not seen since mid-2021.

Alan Taylor, a new member of the Bank of England’s monetary policy committee, signalled his openness to more aggressive easing. He remarked last week that five or six rate reductions could help guide the economy towards a “soft landing.” His colleague will support his comments as an independent member of the MPC, Swati Dhingra, although the committee’s “resident hawk” Catherine Mann has not commented recently about her view on inflation.

In her last interview, published in November, she commented that “100 basis points, I see as too aggressive,”. “That would not be consistent with my view on prospects for demand conditions going forward and the underlying inflation persistence.”

Sir Keir Starmer has claimed Britain’s economy is “starting to turn around”, in the face of growing fears that the UK is teetering on the brink of recession once again.

Speaking to reporters after a meeting with business bosses in the City yesterday, the Prime Minister said, “We have to get our economy working. I think we’re beginning to see how that’s turning around.”

Starmer’s positive comments fuelled some buying interest in the Pound, which was trading cautiously amid worries that the economy could face risks of stagflation amid weakening labour demand and a stubborn inflation outlook.

The hiring momentum in the UK private sector has been hit hard since Chancellor of the Exchequer Rachel Reeves raised employers’ contribution to National Insurance (NI) in the Autumn Budget.

The pound eventually succumbed to the possibility of further protectionist policies being passed in the U.S. It fell to a low of 1.2414 and closed at 1.2441.

Fed Chairman Jerome Powell may well be about to tread on thin ice in his relationship with President Trump as many observers believe that the FOMC will leave rates unchanged at its meeting which concludes later today.

Trump takes a simplistic view of the economy, looking at it in “splendid isolation” from the rest of the world. He will have received a nasty jolt to his view earlier in the week as the Chinese release of an AI-driven “chatbot” saw asset markets tumble.

Trump believes that the U.S. has a monopoly on AI and will have been aggravated by what he views as Chinese temerity.

Dennis Lockhart was the president of the Federal Reserve Bank of Atlanta during the decade that saw the fall into the Great Financial Crisis and the long haul to get out of it, when he collaborated with Ben Bernanke, Janet Yellen, and Powell. Like other former Fed officials, he has a keen sense of the internal dynamics of Fed policymaking and how it guides decision-making.

Now, as President Trump introduces potentially game-changing policies from tariffs to deportations, Lockhart sees the Fed in wait-and-see mode in January. Looking ahead, “I see the March meeting as shaping up to be more interesting,” he says, “You just don’t know yet.”

Rates have been restrictive for a considerable time as the FOMC has battled inflation, a tussle that is not over yet, as the December Personal Consumption Expenditures data will probably show.

It would be surprising if Trump considers the Fed’s goal of inflation reaching 2% consistently as either achievable or necessary.

He prefers to paint on a large canvas with broad strokes. He expects the Fed to bend to his will, even as he pays lip service to Central Bank independence.

Credit data, likely to be considered at the FOMC meeting, may show pumps primed for increased bank lending, even as the prospect for gains is complicated by an uncertain economic environment and still-daunting borrowing costs tied to central bank policy.

Trump’s likely policy initiatives will likely see inflation increase as the economy remains in a robust state.

The market has returned to the effect of Trump’s economic policies, which are likely to weaken the economies of several of his country’s trading partners. The risk-on effect has seen the dollar begin to rally again.

It climbed to a high of 107.96 yesterday, closing at 107.81, as it bound off the level at which it started its previous rally.

It is likely to receive support from today’s FOMC decision, particularly as the ECB is likely to cut rates tomorrow.

Central Bank independence is being challenged in parts of the world and greater political influence could undermine banks’ ability to keep inflation down, risking economic volatility, European Central Bank President Christine Lagarde said on Monday.

While not referencing the U.S. directly, she is concerned about Trump’s plans to introduce tariffs on U.S. imports, as well as his efforts to force interest rates lower by haranguing the Fed Chairman.

President Trump said last week he would demand that the Federal Reserve lower borrowing costs, claiming that he knew interest rates much better than the people in charge of making that decision.

While the comment is considered more rhetoric than a plan to curtail the Fed’s independence, politicians have been encroaching into an area that has generally been off-limits to them for decades.

Thankfully for Lagarde, European politicians are largely grateful to have a Central Bank which most reflects the views of the Union’s largest economies.

Joachim Nagel, the President of the Bundesbank, has largely supported the ECB in its battle to see inflation fall, even as his home economy has come close to collapse. Without saying so in public, Nagel would have done things differently, were he to have been advising the coalition which recently collapsed.

Germany’s stringent constitutional rule on new borrowing, known as the “debt brake,” has been a focal point of political debate in recent years. The rule restricts the federal government’s structural deficits to 0.35% of GDP, while regional governments (states) are entirely barred from running structural deficits.

Traditionally, the Bundesbank has been known for its “hawkish” stance on both monetary and fiscal policy, emphasizing price stability, which mirrors the ECB’s position. However, the Bank has recently shifted its position, proposing a “stability-oriented reform” that would permit increased public investment if the overall public debt level falls below the EU’s target of 60% of GDP.

These are the structural changes that the German economy has been crying out for as it went from being Europe’s strongest economy to its weakest.

The European Central Bank’s latest Bank Lending Survey revealed a modest easing in credit conditions in the fourth quarter, albeit at a slower pace compared to earlier in the year.

The ECB, amid a rate-cutting cycle, aimed at stimulating economic activity by making borrowing less expensive. This strategy has indeed sparked an increased appetite for credit, notably within the mortgage market. However, banks have concurrently tightened their credit standards, balancing the heightened demand.

Tomorrow’s meeting of the ECB’s Governing Council is expected to cut the rate on its deposit facility from 3% to 2.75%, although there is a remote possibility that it will be cut to 2.5%.

A mix of monetary policy diversity and the new U.S. Administration’s economic and trade policies have set the euro back on a path towards parity with the dollar.

Yesterday, it fell to a low of 1.0413. It closed at 1.0431. There is likely to be some support around the 1.0400 which recently attracted some buying interest, but overall, the path for the Euro appears to be lower.

Have a great day!