The first week of February brings the RBA, the BoE, and the ECB. One is expected to hike, the others look to stay on hold. But, the nuances will be carefully watched.
Let’s start with the RBA. It has been far less aggressive with rate cuts since 2024. Compared to the RBNZ (-325 bps), the Riksbank (-225 bps), the ECB (-200 bps), the SNB (-175 bps), and the BoE (-150 bps), the RBA has reduced its cash rate only 75 bps, and all of it in 2025. The RBA has been more cautious due to the stickiness in inflation and tightness in the labour market. The hints started during the September meeting, when Governor Bullock said that while she wasn’t concerned that “inflation is running away… we just need to be a little bit cautious”. In November was the acknowledgment that “inflation has recently picked up” and was “materially higher” than forecast. And, the big hint: “it is possible there are no more rate cuts”. Markets got the message. In December, rate hikes were discussed “quite a lot”, while cuts weren’t even mentioned. Since then, employment surged by over 65k, cutting the jobless rate 0.2 ppts to a 7-month low of 4.1%; household spending picked up; and inflation heated up (the trimmed mean CPI was up 3.4% y/y in Q4, the fastest in over a year). We look for the RBA to raise the cash rate 25 bps to 3.85%.
A couple of days later, the BoE is expected to leave its Bank Rate unchanged at 3.75%. But, according to our Laurence Mutkin, Director & Head of EMEA Rates Strategy, the Minutes of the meeting are more critical; specifically, the section with each policymaker’s mini-manifestos. Governor Bailey carries the swing vote, given hardening positions of the more centrist dove (Ramsden) and hawk (Greene). His December emphasis on “the extent to which inflation settles at the 2% target in an enduring way” surely implies at least 3 months of CPI printing close to 2%, which would rule out a cut before July, at least. So, watch for any change of language that will allow himself more “wiggle room” to vote for a cut while CPI dips. Also keep an eye on Sarah Breeden. She voted for a cut in November and December, saying both times that she “will need a greater accumulation of evidence on disinflation as we feel our way towards neutral next year”. That would be consistent with switching to “hold” at this meeting, given the recent data. This would take the vote to a 6-3 (rather than 5-4) hold, and we would expect the market to further reduce its pricing of rate cuts.
Finally, the ECB. It has stuck to its view that “policy is in the right place”, as Euro Area inflation is on target, medium-term CPI expectations are well anchored, and economic growth is steady. The region is diversifying its trading partners, with agreements recently signed with India (“the mother of all deals”), the Mercosur bloc, and Vietnam. It will take time (at least a couple of years) before both deals can take effect (e.g., the European Court of Justice was asked to go through the Mercosur deal with a fine-toothed comb). But this is progress for Europe. As far as the next ECB meeting goes, as the Bundesbank’s Nagel said, “there is no good argument for changing rates in either direction” in February. However, the events of the past month—Greenland, new U.S. tariff threats—and the likelihood of greater uncertainty ahead are raising some concerns among policymakers. But, the urgency to increase defence spending is growing daily, particularly as governments strive to meet the 5% of GDP requirement for NATO. For the February meeting, focus not on the announcement but on President Lagarde’s press conference to gauge how concerned the Governing Council is about this new threat, not just to trade but to Europe’s political stability.$BULLA
