Take two: Fed cuts monetary easing expectations; Eurozone inflation rises
- 13 January 2025 (3 min read)
What do you need to know?
Federal Reserve (Fed) officials conveyed their concerns about inflation and the possible impact that President-elect Donald Trump’s policies may have on efforts to lower it, minutes from the bank’s December meeting showed. While Trump was not explicitly mentioned, the minutes said that “recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the [return to target inflation] process could take longer than previously anticipated”. The Fed had already announced a change in outlook for expected interest rate cuts in 2025 to two from four at its December meeting, where it cut rates by 25 basis points bringing borrowing costs down to between 4.25%-4.50%.
Around the world
Eurozone inflation rose for the third consecutive month to 2.4% on an annual basis in December, up from 2.2% in November, on the back of increasing energy costs. The data was in line with market expectations and marks the bloc's highest rate since July. Despite the rise, the European Central Bank is still expected to cut interest rates at its 30 January meeting, as the uptick is partly due to temporary effects which should cool later in the year. Meanwhile, core inflation, which excludes the more volatile components of energy, food, alcohol and tobacco, held steady for a fourth straight month at 2.7%.
Figure in focus: £4.25bn
The UK government sold £4.25bn of five-year bonds in the biggest auction of that maturity in more than a decade, in what became a difficult week for global bond markets. Sterling fell against the dollar as fears surrounding the scale of gilt issuance came against a backdrop of stickier UK inflation, but also broader concerns about potential US trade tariffs and concerns that the Fed will make fewer interest rate cuts took hold. Yields on US Treasuries increased while 10-year UK government bond yields rose to their highest level since 2008, exacerbated by concerns over the UK’s fiscal deficit. In addition, tariff concerns sent the Chinese renminbi to a 16-month low.
Words of wisdom
Geothermal energy: Underground heat which can be harnessed to generate electrical power, offering an abundant, flexible and clean energy source. A recent study from the International Energy Agency (IEA) found that the growth of geothermal energy could generate investment worth $1trn by 2035 and $2.5trn by 2050. Elsewhere European Union data confirmed that 2024 was the hottest year on record with the average global temperature 1.6°C above pre-industrial levels, above the Paris Agreement’s sustained 1.5°C target. While this does not mean the 1.5°C target has been breached – as it’s based on long-term averages – it does take the planet closer to this point.
What's coming up?
Inflation is in focus this week as India releases its December report on Monday with the US and UK following up with their own respective numbers on Wednesday. On the same day industrial production figures for the Eurozone are published alongside Germany’s 2024 GDP growth data. Thursday sees UK GDP figures for November, while the US publishes its December retail sales report. On Friday China announces its fourth quarter (Q4) GDP growth rate – the world’s second largest economy expanded by 4.6% year on year in Q3.
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