UK Inflation Likely to Hit 10-Month High, Fueling BOE Cut Concerns

UK inflation is projected to surge to its highest level in 10 months in January, as per the median estimate of economists surveyed by Bloomberg. This increase is primarily driven by spikes in private school fees and the reversal of volatile factors that dampened inflation in December. The figures may intensify worries among Bank of England (BOE) policymakers that Britain's inflation outlook is worsening amid economic stagnation. The BOE expects energy bills to further fuel consumer price growth to 3.7% later this year.

While two officials supported a more substantial half-percentage-point cut when the UK central bank eased monetary policy earlier this month, the majority of the committee remains cautious about lowering borrowing costs too quickly. Of particular concern is an increase in underlying measures closely monitored by the BOE for signs of domestic inflationary pressures. Service inflation is anticipated to rebound sharply from 4.4% to 5.2%, influenced by erratic components like airfares and elevated expenses at private schools due to the introduction of VAT by the Labour government.

Labor Market and Global Economic Data in Focus

The labor market will also be under scrutiny this week. Forecasts suggest wage growth excluding bonuses will rise from 5.6% to 5.9% in the fourth quarter, maintaining inflationary pressures. Despite signs of a softening jobs market, pay pressures are deemed too robust to keep inflation near the BOE's 2% target. Data indicates that the number of UK workers facing layoffs remains significantly lower than a year ago. Companies, scarred by recruitment challenges during the post-COVID labor market, may be reluctant to let go of employees and are hoarding labor.

Elsewhere, Australia's first rate cut in the current cycle, a further reduction in New Zealand, and global purchasing manager indexes will be notable economic releases.

US and Canada

January housing data indicates a slowdown in housing starts. New home construction decreased in 2024 due to elevated borrowing costs and resale market prices. The National Association of Realtors projects a decline in contract closings on previously owned home sales. The Federal Reserve's reluctance to cut interest rates further, coupled with persistent inflation, may pose challenges for builders this year. The minutes of the January meeting, where policymakers kept interest rates unchanged, are scheduled for release on Wednesday.

Inflation data from Canada is expected to show a moderate increase in the headline rate, with core measures also ticking up. Improving underlying price pressures may raise expectations of a pause in the Bank of Canada's easing cycle, but uncertainty over US tariff threats complicates its next moves. Governor Tiff Macklem will speak on trade, structural change, and monetary policy.

Asia

In its first meeting of 2025, the Reserve Bank of Australia is widely expected to cut its cash rate target to 4.1% on Tuesday, joining the global monetary easing trend. The decision follows a sharper-than-expected slowdown in core inflation during the fourth quarter. Neighboring New Zealand is anticipated to continue its easing cycle with a 50-basis-point reduction in its benchmark rate to 3.75%. Bank Indonesia is likely to keep rates on hold on Wednesday. Chinese lenders, guided by the central bank, are expected to maintain the 1-year and 5-year loan prime rates steady on Thursday.