Wage inflation the main challenge to rate cuts

Macro Commentary

UK policymakers remain cautiously dovish, reinforcing market expectations of an easing cycle starting in August, and around 0.75% of cuts forecast this year. The committee remains particularly wary of cutting too soon, and although headline inflation is expected to ease further towards target, wage inflation remains far too high. Officials played down the significance of the technical recession with the inflation outlook still arguably more important for monetary policy than growth. The committee remains conscious that the full extent of rate increases has still not fully fed into the underlying economy.

Meanwhile, the budget on March 6th will put fiscal policy in focus, and what the implications are for the growth outlook.  

In the US, inflation also remains the key driver of monetary policy and is likely to moderate further in the coming months, with rate cuts expected to start in June. The US economy continues to strongly outperform, and the growth outlook will determine the depth of rate cuts, with market forecasts reduced to 0.85% for this year.

In Europe, despite data this week indicating that wage pressures may have peaked, policy makers remain keen to suggest no rate cuts before summer. The market, however, still expects them to cut first, and perhaps as early as April, as the economic outlook remains bleak.

On the exchanges, the dollar has weakened on lower US rate cut expectations but remains very much within recent ranges on a lack of real market conviction. Little in the way of data next week, with interest rate differentials continuing to drive the narrative.

GBP/USD – 1-year chart

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*Bloomberg survey / Not available

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