((Commonwealth_Europe) inflation is expected to have reached its highest level in 10 months in January, continuing a resurgence in price pressures that has made the Bank of England cautious about rushing into interest rate cuts. Data due on Wednesday is projected to show consumer prices rising 2.8% year over year, driven by a surge in private school fees and a reversal of volatile factors that weakened inflation in December, according to the median forecast of economists surveyed by Bloomberg. This increase in inflation could fuel concerns among the Bank of England’s rate-setters that the UK’s inflation outlook is worsening, particularly as the economy stagnates. The bank expects higher energy bills to push consumer price growth to a peak of 3.7% later this year.
While two Bank of England officials supported a more aggressive half-point rate cut when the central bank eased monetary policy earlier this month, the majority of the committee still favors a cautious approach to lowering borrowing costs. The most worrying aspect for the bank will be the expected uptick in underlying inflation measures, especially those closely monitored by the Bank of England for signs of domestic pressures. Services inflation is expected to rebound sharply from 4.4% to 5.2%, primarily driven by erratic components like airfares and an increase in private school fees, which were recently subjected to VAT by the Labour government.
Bloomberg Economics predicts that, despite weak economic conditions, the Bank of England may ease further, expecting three more 25-basis point rate reductions in 2025. The labor market will also be in focus this week, with data on Tuesday expected to show wage growth excluding bonuses picking up to 5.9% in the fourth quarter, up from 5.6% previously. Although there are signs that the UK labor market is loosening, pay pressures remain strong, which could make it difficult to bring inflation down to the Bank of England’s 2% target. Data indicates that the number of UK workers being put on notice for layoffs is well below levels seen a year ago. Having faced recruitment challenges in the tight post-Covid labor market, companies may still be reluctant to let go of workers, opting to hoard labor instead.
Elsewhere, Australia is set to make its first rate cut in the current cycle, with a reduction in its cash rate target to 4.1% on Tuesday, following core inflation slowing more than expected in the fourth quarter. New Zealand is also expected to continue its easing cycle, with another 50 basis points cut to 3.75% in its benchmark rate. In Asia, Bank Indonesia is forecast to hold steady, while China’s central bank is expected to maintain the 1-year and 5-year loan prime rates.
In the US, the economic calendar will be quieter during the holiday-shortened trading week, but reports on the housing market are still expected. On Wednesday, government data is forecasted to show a slowdown in housing starts in January. Builders have shifted focus to clearing inventory against the backdrop of high borrowing costs and elevated prices in the resale market. On Friday, figures from the National Association of Realtors are expected to show a decline in contract closings on previously owned home sales. The Federal Reserve is not expected to reduce interest rates quickly, as inflation has yet to be fully addressed. Minutes from the January Fed meeting are due on Wednesday, and investors will also hear from several Fed officials this week.
In Canada, inflation data for January is anticipated to show a slight increase to 1.9%, with core measures also accelerating. This momentum in underlying price pressures may prompt market bets on a pause in the Bank of Canada’s easing cycle. However, uncertainty over US President Donald Trump’s tariff threats complicates the Bank of Canada’s future decisions. Governor Tiff Macklem will deliver a speech on trade, structural change, and monetary policy, which may offer insights into the bank’s response to a potential trade war.
In Europe, the European Union will release data on its trade surplus with the US for 2024, which will shed light on the ongoing trade tensions with the US. Reports on confidence among German investors and euro-area consumers are expected on Tuesday and Thursday, respectively. Germany’s Chancellor Olaf Scholz has stated that the European Union is strong enough to counter US tariff threats but hopes for a negotiated agreement to avoid a trade war. The European Central Bank will also release its 2024 financial statements and hold speeches from officials, including Chief Economist Philip Lane.
In Africa, South African Finance Minister Enoch Godongwana will present the annual budget on Wednesday, with investors keen to see if the government will stick to its fiscal consolidation plans amidst increasing spending pressures. Meanwhile, South Africa’s inflation is expected to climb slightly to 3.2% in January, partly due to higher food and gasoline prices. Other African central banks are likely to keep rates unchanged, including in Nigeria, Botswana, and Egypt.
Colombia’s economy is likely to have rebounded modestly in Latin America last year, with analysts expecting faster growth in 2025. In Brazil, inflation expectations continue to climb, complicating the central bank’s tightening efforts. Brazil will also report December GDP-proxy data, which is expected to show weakness. Argentina’s data for January will include the budget, trade balance, exports, and imports. Meanwhile, following a surprise dovish stance amid US tariff risks, the central bank of Mexico will release the minutes of its February meeting.
