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LONDON (Reuters) – The Bank of England kept interest rates at a nearly 16-year high on Thursday but softened its stance about the possibility of cutting them and one of its policymakers cast the first vote for a reduction in borrowing costs since 2020.BoE Governor Andrew Bailey said inflation was “moving in the right direction” shortly after the Monetary Policy Committee ditched its previous warning that rates could rise again and instead said borrowing costs would be kept “under review”.The MPC split three ways on the right course for policy with six of its nine members voting to keep rates at 5.25%, Jonathan Haskel and Catherine Mann voting for a 0.25 percentage-point hike and Swati Dhingra backing a cut of the same size.It marked the first time since August 2008 – early in the global financial crisis – that different policymakers have voted to move interest rates up and down at the same meeting.Economists polled by Reuters had mostly expected only one policymaker to vote for a rate rise, and for the remainder to vote to keep rates on hold. The pound and British government bond yields rose modestly after the BoE announcement. Investors slightly reined in their bets on the extent of cuts to Bank Rate over 2024 but still saw four reductions for the year.”The balance of argument is edging slowly towards rate cuts, but the Bank cannot risk cutting rates and then having to raise them again as inflation revives,” Ian Stewart, chief economist at Deloitte, said.Bailey stressed that the BoE remained cautious and inflation falling to its 2% target would not be “job done.””We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates,” he said.But in a softening of its language on the outlook for interest rates, the BoE dropped its warning that “further tightening” would be required if more persistent inflation pressure emerged.Instead, the BoE said it would “keep under review for how long Bank Rate should be maintained at its current level”.Officials at the U.S. Federal Reserve and European Central Bank have been more explicit that rate cuts are on the agenda. Late on Wednesday the Fed said its rates had peaked and would move lower later this year.INFLATION TO FALL, WAGE GROWTH STILL STRONGThe BoE reiterated that policy would need to stay “restrictive for sufficiently long” – even as it slashed its inflation forecast for the coming months.However, considerably higher wage growth set Britain apart from its peers in driving inflation pressure over the longer term, the BoE said.Annual consumer price inflation now looks likely to return to 2% in the second quarter of this year, albeit briefly, in a sharp downgrade of the BoE’s near-term outlook for price growth compared with November’s projections.But the medium-term forecast – based on a much lower market path for interest rates than in November – showed inflation would rise back above 2% in the third quarter of 2024 and not return to target until late 2026, a year later than the BoE had forecast in November.The BoE stuck to its view that Britain’s economy will struggle to generate much economic growth in the quarters ahead, despite a modest upgrade to the annual growth projections.In a small boost for finance minister Jeremy Hunt, the BoE judged that his tax cuts announced in November would boost British economic output slightly in the years ahead.But the central bank largely maintained its forecast for weak household income growth after tax and inflation, with the cost of living a key issue ahead of a likely national election this year.Households’ living standards have fallen over the past two years due to high inflation, contributing to the electoral challenge facing Prime Minister Rishi Sunak.Hunt is preparing a budget to be delivered on March 6 that is likely to include tax cuts in a pre-election bid to woo voters back to the Conservative Party, which is lagging badly behind the opposition Labour Party in opinion polls.Earlier this week the International Monetary Fund warned Hunt not to cut taxes, due to high levels of public debt and growing demands on services, and trimmed its outlook for British economic growth in 2025. More

LONDON (Reuters) – Major central banks stood pat on interest rates in January, as the much anticipated change of course in the global monetary policy draws closer while emerging market peers ploughed on with rate cuts.January saw five of the central banks overseeing the 10 most heavily traded currencies – the U.S. Federal Reserve, the ECB, the Bank of Japan, Bank of Canada and Norges Bank – hold rate setting meetings with none changing rates. That follows on from eight meetings in December where only Norway hiked. “Interest rates are set to remain front and centre in 2024,” Philip Shaw at Investec said in a research note. “However, in a departure from the last two years, now the question is not how far central banks will raise rates, but when and how far they will cut.”Fed chair Jerome Powell on Wednesday delivered a sweeping endorsement of the U.S. economy’s strength and said the next rate move would be lower. But he also pushed back against markets betting on a move as soon as March, with expectations now anticipating a first Fed cut in May. Meanwhile, emerging economies – which have been frontrunning both the tightening and the easing cycle – ploughed on with rate cuts.Five of the Reuters sample of 18 central banks in developing economies cut rates in January – matching the December number which had been the highest number in at least three years. Across the Reuters markets sample, 12 central banks held rate setting meetings last month.Policy makers in Brazil, Hungary, Colombia and Chile all extended their easing push, while Israel joined the fray, delivering the first rate cut in four years. The moves brought the January rate cut tally to 275 basis point – the biggest monthly total since May 2022. Turkey was the sole outlier in January, delivering another 250 bps rate hike to shore up its battered currency and tackle sticky inflation, though the central bank said it had now completed its aggressive tightening cycle. Analysts predicted that monetary easing would continue to broaden out in the months ahead. “Mexico’s central bank will probably be the next to cut rates later this quarter, and many Asian central banks will join the fray in April and May, which is sooner than most expect,” said William Jackson at Capital Economics in a note to clients. More

Euro zone headline inflation eased slightly in January, flash figures published by the European Union’s statistics agency showed on Thursday, while core figures declined less than expected.
Annual headline price rises came in at 2.8%, in line with a forecast of economists polled by Reuters. Inflation stood at 2.9% in December, up from 2.4% in November, largely due to the wind-down of energy price support measures.
Core inflation dipped to 3.3% in January from 3.4% in December. A Reuters forecast indicated a fall to 3.2% for last month.

Patrons at sidewalk tables of Janis bar in Cais do Sodre in Lisbon, Portugal.
Horacio Villalobos | Corbis News | Getty Images

Euro zone headline inflation eased slightly in January, flash figures published by the European Union’s statistics agency showed on Thursday, while core figures declined less than expected.
Annual headline price rises came in at 2.8%, in line with a forecast of economists polled by Reuters. Inflation stood at 2.9% in December, up from 2.4% in November, largely due to the wind-down of energy price support measures.

Core inflation dipped to 3.3% in January from 3.4% in December. A Reuters forecast indicated a fall to 3.2% for last month.
By sector, services inflation — an important gauge for policymakers due to its link to domestic wage pressures — held steady at 4%. Disinflationary effects from the energy market continued to reduce, from -6.7% to -6.3%.
Economic growth has been stagnating in the bloc.
Preliminary figures out earlier this week showed inflation in Germany easing slightly more than had been forecast, reaching 3.1%. The euro zone’s biggest economy has become one of its main drags on growth, with the German GDP contracting by 0.3% in the fourth quarter.
European Central Bank officials are monitoring a host of data to see if and when they can begin bringing interest rates down from their current record highs. Price rises have cooled significantly from a peak of 10.6% in October 2022, with the central bank’s 2% target coming into sight.

While markets continue to price in cuts starting in April, some policymakers have pushed back with suggestions that declines are likelier to take place in the summer or even later. The ECB stresses it remains data-dependent.
At last week’s monetary policy meeting, when interest rates were left unchanged, ECB President Christine Lagarde said that the “disinflation process is at work” despite the December uptick.
Kamil Kovar, senior economist at Moody’s Analytics, said the figures presented a “mixed bag.”
“The decline to 2.8% was welcome news, especially relative to ECB projections that were for an increase in the inflation rate. But it was driven by a downside surprise in energy, which is all the more shocking given the end of government interventions,” Kovar said in emailed comments.
“However, core inflation only inched lower, with services especially coming in quite hot. While some of this hot reading is explained by regular annual re-pricing and a change in weights, it nevertheless makes a March rate cut a pipe dream, and raises [the] bar for a cut in April. A cut in June remains our baseline forecast.” More

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OTTAWA (Reuters) – Thousands of Canadian small businesses face the risk of bankruptcy after the government ended pandemic-era support last month with the economy slowing at a time of high interest rates.Small firms that employ fewer than 100 people are critical to the Canadian economy as they give jobs to almost two-thirds of the country’s 12 million private workers. A spike in bankruptcies, which jumped 38% in the first 11 months of 2023, would weigh on economic growth, lobby groups and economists warn.Last month, small businesses faced a deadline to repay interest-free loans of C$60,000 ($44,676) made available to each of them during the pandemic. Of the 900,000 who had taken the government support, a fifth have not yet repaid their loans, Finance Minister Chrystia Freeland said on Monday. The Canadian Federation of Independent Businesses (CFIB), a small-business lobby group, estimates a quarter missed the deadline.Katherine Cuplinskas, a spokesperson for the finance minister said in an emailed response to a Reuters question that the Department of Finance did not expect there will be a negative impact on the economy on account of repayment of the loans given as support during the pandemic. Katherine Cuplinskas, a spokesperson for the Finance Minister said in an emailed response that the Department of Finance did not expect there will be a negative impact on the economy on account of repayment of the loans given as support during the pandemic. She said loan recipients have long had full information on timelines and have been able to plan accordingly.There were about 1.2 million small businesses with employees in Canada in 2021 and contributing over a third to the country’s gross domestic product, according to the latest official data. “There are tens of thousands, if not hundreds of thousands, of businesses that remain viable, but will not be able to outrun their debt,” Dan Kelly, CFIB president, told Reuters, adding many debts could only be repaid by borrowing at a higher interest rate from banks.Of those who repaid, CFIB estimates that about 225,000 took out a bank loan to do so, at a time when interest rates in the country are at 22-year high. Those who did not get a loan but missed the deadline must make regular payments for two years at 5% annual interest.”We do anticipate… a rise in insolvencies over the next six months or so,” Stephen Tapp, chief economist at the Chamber of Commerce, said in an interview.The Conference Board of Canada (CBC), an independent think tank, forecasts that consumer spending in 2024 on a per capita basis is expected to slump further from what was already seen last year.CBC estimates first quarter corporate profits to nearly half to C$104.5 billion from a year ago, and the rest of the year will also be weaker than 2023 with companies hit by higher costs and drop in sales.”Warren Buffett says when the tide goes out you see who is swimming naked,” CBC’s chief economist Pedro Antunes said. With the government support receding, the small businesses will be the ones exposed, he added.($1 = 1.3430 Canadian dollars) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Eurozone inflation slowed to 2.8 per cent in January, but the decline in underlying price measures was less than economists expected after stripping out more volatile energy and food costs.The renewed decline in the headline rate of eurozone inflation, after it briefly ticked up to 2.9 per cent in December, will support investors’ expectations that the European Central Bank could cut interest rates as early as this spring.However, the unchanged rate of growth for labour-intensive services prices could encourage the cautious approach of some ECB rate-setters who have said they want to see signs that wage growth is moderating before lowering borrowing costs.Eurostat, the EU’s statistics arm, said on Thursday that services prices rose at an annual rate of 4 per cent for the third consecutive month in January.Core inflation, excluding more volatile energy and food costs to give a better idea of underlying price pressures, remained slightly higher than economists expected despite slowing from 3.4 per cent in December to 3.3 per cent in January. Economists had forecast a core rate of 3.2 per cent in a Reuters poll. “While the eurozone’s headline and core inflation rates both edged down, policymakers are likely to be concerned that disinflation in the services sector has stalled,” said Jack Allen-Reynolds, an economist at consultants Capital Economics.European government bond yields held on to their earlier gains on Thursday as investors judged the data reduced the odds of an early rate cut by the ECB.Yields on rate-sensitive two-year German Bunds were up 0.06 percentage points on the day at 2.47 per cent. German 10-year Bund yields, a benchmark for the eurozone, rose 0.05 percentage points to 2.21 per cent. Yields move inversely to prices.Western central banks are weighing the risk of a resurgence in price pressures if they lower borrowing costs too early against the danger of doing unnecessary damage to growth and jobs by waiting longer than needed.Jay Powell, chair of the US Federal Reserve, pushed back against investors’ bets it could cut rates as early as March, saying on Wednesday this was not its “base case”. On Thursday, Bank of England governor Andrew Bailey said it needed “more evidence” of disinflation before it would cut rates.ECB president Christine Lagarde said last week it was “premature to discuss rate cuts” even though inflation was expected to “ease further over the course of the year”.After the eurozone economy stagnated for much of last year, investors have bet the ECB will respond to the rapid cooling of price pressures by cutting its benchmark deposit rate from its current record high of 4 per cent as early as April.While annual inflation remains above the ECB’s 2 per cent target, monthly price growth has been trending below that level since last autumn. Between December and January, eurozone prices fell 0.4 per cent.Annual inflation fell in half of the 20 countries that share the euro and ranged from 0.7 per cent in Finland to 5 per cent in Estonia. However, several rate-setters have said they want to see more evidence that labour costs are moderating from collective wage agreements in the first quarter of this year after wage growth reached 5.3 per cent last year.The resilience of Europe’s job market, despite higher borrowing costs and weak growth, was underlined by data published on Thursday showing eurozone unemployment remained at a record low of 6.4 per cent in December. There were 10.9mn jobless people in the region, down 17,000 from a month earlier and 369,000 from a year ago.Kamil Kovar, an economist at Moody’s Analytics, said the “hot reading” on services inflation “makes a March rate cut [by the ECB] a pipe dream, and raises the bar for a cut in April. A cut in June remains our baseline forecast.”Additional reporting by George Steer in London More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayGreetings. Central banks are all holding fire: the European Central Bank last week, the Federal Reserve yesterday and, in all likelihood, the Bank of England today. The policy question has become not whether to cut rates but when. And I observe that my colleagues, too, think it is appropriate to cut rates this year. As readers know, I always thought it was wrong to tighten into what I saw as supply-driven inflation. So if “team transitory” and “team persistent” are finally on the same page about what to do next, how should we today judge their earlier disagreement? On the one hand, I could say “we told you so”, where “so” refers to inflation coming down faster than people thought without any need for unemployment going up, and that we wouldn’t need to loosen now if we had tightened less in the first place. On the other hand, they could say “when the facts change, sir” and make references to stopped clocks. Rather than point-scoring, below are some lessons, observations and self-criticism I propose to draw from the inflationary episode — and I tease out some puzzles that remain unresolved.First lesson: The inflationary episode is over and has been behind us for a few months. As I pointed out last week (and see Numbers News below), prices stopped rising as last summer turned to autumn. We should not misinterpret the gradual slowdown in year-on-year measures as saying there is still some way to go.Second lesson: Does this vindicate team transitory? If it really is all over, the period of prices rising faster than central banks’ target rate will have lasted about two years. That is not long. It is entirely consistent with a couple of big supply shocks cascading through the economy as different sectors are affected in different ways. It is also entirely consistent with “excess demand” never having been a problem. In other words, the price behaviour we have observed is supremely unsurprising from the perspective of my argument in 2021 that price pressures were supply-driven, not demand-driven and would go away by themselves as the ketchup-bottle economy asserted itself. So I think I pass the tests I set for myself back then and renewed in June 2023, when I gave each supply shock 14 to 16 months to work its way through the system through temporarily higher inflation. There were, of course, several supply shocks that could not have been predicted in advance (Russian President Vladimir Putin’s first throttling of gas in late 2021, then his energy war in 2022, and his invasion’s effect on food commodity prices). What we have seen fits nicely with the latest Geneva Reports’ modelling of price shocks that cascade from one sector to another. If anything, two years is surprisingly short for all these shocks to be processed.Third lesson: Nevertheless, I was wrong in thinking that by now, central bank monetary tightening would have had an effect on demand and employment. (For those who think it’s thanks to central bank tightening that inflation is over, read on to the next point.) But note that both sides of the debate were wrong about this. I (and others on team transitory) thought raising interest rates would unnecessarily sacrifice income growth and jobs, since inflation would go away by itself. Team persistent thought it would sacrifice them as the unavoidable price for getting excess demand and, therefore, price pressures down. We were all blindsided by how well real activity has weathered the rate rises, especially in the US. Admittedly, growth has stagnated in Europe — but it’s hard to identify whether that is because of rates, energy prices (which rose particularly strongly in Europe), general uncertainty because of war in the region, or something else. And in any case, there are no job losses: on the contrary, some economies have record employment.Fourth lesson: That means monetary policy cannot have brought inflation down through its effect on the labour market, because there was no such effect. So what do you have to believe if you think “monetary policy did it”? Many of those who called strongly for central bank tightening earlier suggest that the fall in inflation vindicates their earlier analysis. But it can’t do so if the causal mechanism they predicted didn’t materialise. The cleanest account of how central bank policy produced “immaculate disinflation” — disinflation without a recession or even much of a slowdown — would say that central bankers were such convincing communicators of their intentions that people just started expecting inflation to be lower, and lower expectations automatically discouraged businesses and workers from bidding up prices and wages. In other words, central banks worked straight on people’s minds. The problem with this view is that medium-term inflation expectations never moved that much in the first place, and that, like all things immaculate, it seems just a little too miraculous. Call it the Jedi central bankers theory: “These are not the price pressures you are looking for.” It is also an (in)conveniently unprovable explanation.Fifth lesson: The US and the eurozone have had remarkably similar inflation processes. Paul Krugman points out that comparing like-for-like, the rise in the price level since the start of 2020 has been exactly the same in the eurozone and the US, except that the former lagged behind the latter by a few months. The same can be said about their monetary policy. What differs is that Europe has had a bigger negative energy price shock, and the US has had bigger fiscal stimulus. I have argued that the fiscal policy difference has played the biggest part in the US’s huge growth outperformance relative to Europe; at the very least, we should conclude that it was always wrong to deem the US’s pandemic fiscal response excessive. Sixth lesson: Given that contemporaneous price growth is now below the 2 per cent target rate of central banks, and on some measures is negative, we shouldn’t be too sure yet that central banks didn’t go too far and are still about to inflict delayed damage, regardless of how exactly their monetary policy affects real economic activity.Seventh lesson: The upshot is that we don’t understand how monetary policy works in today’s economy. At least we should hope we don’t, for if it does turn out to work like we used to think it does, we should soon see things get a lot worse as higher rates finally start biting and throwing people out of jobs.Putting it all together, I think it remains plausible to argue that central banks never needed to tighten as much as they did. Conversely, it was wrong to think economies needed to slam on the growth brakes to safeguard price stability (although the growth brake itself seems not to be working). What do Free Lunch readers think? Let us know!Other readablesNumbers newsThe eurozone economy flatlined in the fourth quarter, with a contraction in Germany offsetting growth in Italy and Spain.The single currency’s inflation keeps falling — France yesterday reported year-on-year inflation falling to a two-year low of 3.4 per cent. In Germany, the year-on-year measure fell to 3.1 per cent. But heed my advice from last week and look at the actual price levels for France and Germany, and you will see that in both countries prices stopped rising altogether in September and remain lower today than in August or July respectively. Inflation isn’t slowing, it has been dead for half a year.Recommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More