Practising Monetary Policy Mindfulness in a Chaotic World

Published: April 04, 2025

Practising Monetary Policy Mindfulness in a Chaotic World
Daniel Farrell picture
Daniel Farrell
Head of International Portfolio Management, Global Fixed Income, Northern Trust Asset Management

Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.

Eurozone Market Update

The ECB cut its deposit rate by 25 bps to 2.5% in March, continuing its easing cycle. Growth forecasts were revised down, reflecting the impact of global geopolitical uncertainty, with GDP expectations at 0.9% in 2025 (down from 1.1%) and 1.2% in 2026 (from 1.4%). The 2027 headline inflation projection was also revised down to 2.0%, with core inflation projected for 1.9%, reinforcing the ECB’s disinflation narrative. The ECB called its stance “meaningfully less restrictive” and emphasised data dependence going forward. The central bank’s positioning should be viewed in the context of significant fiscal developments in Germany (see Chart of the Month), where planned constitutional amendments will enable increased defence spending and a €500bn infrastructure fund. These measures could support medium-term Eurozone growth and reduce the likelihood of rates falling below neutral.

Source: Bloomberg, data as of 31 March 2025

UK Market Update

In March, the BoE voted 8-1 to maintain the Bank Rate at 4.5%, citing persistent services inflation and wage growth as justification for a gradual approach to easing. The Office for Budget Responsibility’s (OBR) Spring Forecast lowered 2025 GDP growth to 1% and projected inflation at 3.2%, with a return to target by 2027. Chancellor Rachel Reeves preserved a £9.9bn fiscal buffer in the government’s Spring Statement, driven by £4.8bn in welfare reforms and modest tax measures. Without these, slower growth and higher yields would have erased the margin. The Debt Management Office announced £299.2bn in planned gilt issuance, slightly below expectations, supporting market sentiment. Despite the buffer, the OBR sees just a 54% chance of balancing the budget by 2029–30, reflecting ongoing fiscal fragility.

Source: Bloomberg, data as of 31 March 2025

US Market Update

The Fed left rates unchanged in March, signalling a wait-and-see approach amid rising uncertainty. The median “Dot Plot” projection still shows two rate cuts in 2025, though more participants now expect fewer cuts. Growth expectations for 2025 were revised down to 1.7%, while core inflation was revised up to 2.8%, broadly in line with market expectations. Chair Powell described the outlook as “unusually uncertain,” citing challenges in interpreting data. President Trump declared 2 April “Liberation Day,” unveiling 25% tariffs on auto-related imports and signalling further measures on lumber, semiconductors and pharmaceuticals. The move sparked a sell-off in auto stocks and raised trade tensions, with Germany, Japan, South Korea and Mexico likely to be most affected. One-year inflation swaps rose to a two-year high of 3.16%, driven by tariff concerns and a stronger-than-expected Personal Consumption Expenditures (PCE) Price Index report.

Source: Bloomberg, data as of 28 February 2025

Looking Ahead

Uncertainty continues to define the global outlook, shaped by geopolitical risks, trade tensions and differing fiscal strategies. These forces are likely to keep influencing both markets and central bank decision-making in the near term. In the UK, we expect the BoE to begin cutting rates from May, with 25 bps moves at each Monetary Policy Report meeting, taking the Bank Rate to 3.75% by year-end. This reflects a more dovish stance than markets currently imply. In the Eurozone, Germany’s fiscal stimulus should help offset tariff-related pressures and may limit how far the ECB takes rates below neutral. We see steady cuts continuing until inflation reaches the target. Meanwhile, the Fed appears ready to look through near-term tariff-driven inflation, at least for now. We anticipate it will keep rates on hold through the first half of the year and then deliver two cuts later in 2025. Across all three regions, flexibility and vigilance will be key for central banks as conditions evolve.

Chart of the Month

Source: Bloomberg as of 31 March 2025

IMPORTANT INFORMATION

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors.

The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust Asset Management’s (NTAM) and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

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Article Last Updated: April 08, 2025

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