It has been a busy week for central banks as monetary policy committee members across the world met to discuss interest rates and the future direction they should take. We saw moves in interest rates both ways; Brazil’s central bank raised rates by 100bps (1%), the Swiss National Bank cut rates by 25bps (0.25%) and both the Bank of England and the US Federal Reserve held rates steady.
We will begin with Brazil, a country we don’t often cover in the weekly notes. This was the third consecutive meeting where committee members voted for a 100bp rise (1%) in interest rates, bringing the current level to 14.25%, a level last seen in 2016. Inflation in Brazil has risen to 5.06%, and Brazil’s central bank has indicated there will be one more hike ahead with the intention of cooling the economy and forcing inflation back towards the 3% target rate. Brazilian equities have performed strongly to begin the year, with the main index up almost 10%.
The US Federal Reserve voted on Wednesday to hold interest rates as Fed Chair Powell described the uncertainty around the US economy as “remarkably high”. US inflation fell in February to 2.8% and the labour market has remained resilient to begin the year. However, the outlook following President Trump’s tariff plans has created a mist of gloom with the potential for slower economic growth, a reacceleration in inflation and a weak labour market. Trump’s tariffs have been mainly threats to date, with the 25% taxes on Mexico and Canada to now begin on 2nd April, so the US Fed are expected to sit on their hands until further potential cuts in summer.
US Retail sales in February rebounded by 0.2% from a -1.2% fall the previous month. The significant fall at the beginning of the year was associated with poor weather conditions, leading to a -1.5% fall in restaurant and bar sales. February’s print showed there was a 2.4% surge in online store purchases, in addition to a 1.7% rise in health and personal care stores. With US consumer sentiment falling due to the macro environment, it is expected that retail sales will remain soft in the coming months.
We have seen quite the reversal of the Magnificent 7 share prices year to date, and Tesla share prices have been hit hard. The stock is down almost -40% year to date. China rivals, BYD, announced this week that they have developed a new platform that could charge their electric vehicles (EVs) as fast as it takes to fill a tank with fuel. Founder Mr. Chuanfu, stated peak charging speeds of 1,000 kilowatts would enable the car to travel 250miles on a 5-minute charge, alleviating any user charging anxiety.
The Bank of England (BoE), as many expected, left interest rates unchanged at 4.5%. Policy committee members voted 8-1 in favour of the pause, with one member voting for a 25bps (0.25%) cut. The outlook from the BoE reflected the uncertain macro backdrop we currently operate under, with the BoE halving the UK’s 2025 growth forecast to 0.75%. We are also days away from the Labour government’s implementation of rising taxes on businesses, which could further stunt economic growth. The BoE has not provided any commentary on the future rate path but concluded that “a gradual and careful approach is appropriate”. UK Gilt yields fell on the news.
UK average earnings excluding bonuses have remained robust, rising 5.9% in the three months leading up to January.
Across Europe, Germany’s parliament voted in favour of injecting hundreds of billions into defence spending. New Chancellor, Mr Fredrich Merz led the drive along with the approval from 513 other MPs, for the creation of a €500bn fund in addition to rule changes around constitutional debt. The plans are set to boost economic growth around Germany as the multiplier effect will see investment in infrastructure, sparking job creation and wage growth. This shift in Germany’s approach should not be understated and has the potential to change the outlook for the country, and potentially Euro region over the coming years. A lack of investment has left Europe lagging the US in terms of productivity growth and output, yet this new bold fiscal plan could help address some of the issues that have led to Europe lagging its counterparts over the last 10 years. Mario Draghi published his paper last year on EU competitiveness and it appears that the new Chancellor of Germany has taken this on board.
It was another week of new all-time highs for gold, breaking through $3,000 an ounce. Central banks appear to be moving away from the USD and have been buying up the precious metal.
Volatility remains high in markets, with the US equity market still under pressure. Europe remains the bright spot, with investor flows continuing to move from the US back to Europe. Elsewhere areas such as infrastructure and resources have rebounded well, benefiting from the planned huge investment from Germany.
Nathan Amaning, Investment Analyst
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