CGTN Europe interviewed Joshua Mahony, Chief Market Analyst at Scope Markets
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00:00Well, in the UK, a surprise fall in the rate of inflation has led to new bets on an interest rate cut next month.
00:06Prices rose 2.5% in December. That's down from 2.6% the month before.
00:13It's the first time inflation has fallen in three months.
00:16However, the rate remains some way off the central bank's target of 2%.
00:21The drop was driven by tourism with a fall in hotel prices and a smaller-than-expected rise in airfares.
00:28Let's talk to Joshua Honey, Chief Market Analyst at Scope Markets.
00:33Joshua, welcome back. Good to see you.
00:34Well, the FTSE surging on this relief over the surprise UK inflation drop,
00:39and I guess the sighs of relief will be heard as far as Downing Street tonight.
00:46Yes, certainly. I mean, look, ultimately, all the conversations over the course of the past week
00:50have been about this surge in the cost of borrowing with Treasury yields moving towards the upside.
00:55That can be attributed to a number of things, but part of it is this perception
00:59that we're going to see a surge in terms of inflation driven by a number of different things.
01:04It could come from Donald Trump when it comes to a breakdown in terms of trade
01:08and the potential for the deterioration of the pound against the US dollar to mean that we import inflation.
01:16But it also could be some of the policies that the Labour Party have enacted
01:21when it comes to the raising of the minimum wage and the raising of national insurance contributions from businesses.
01:29But nonetheless, instead of seeing that instead of seeing that surge in terms of prices,
01:33we're seeing this good news story come to the fore and it is emboldening markets
01:38and starting to make them think actually maybe we've got it wrong
01:41and maybe we are going to see a rate cut in February
01:44and maybe we're going to see a looser monetary policy outlook from the Bank of England.
01:48What's your guess? Do you think this all means the UK will see more rate cuts?
01:56Well, I mean, right now markets are pricing 84% chance that we see a rate cut in February.
02:01So that seems pretty much nailed on. Generally, you don't see central banks pushing back at such high percentages.
02:07The question mark is how many will we see this year? Markets pricing another one to come in June.
02:12I think certainly if you look at the so-called base effects of inflation,
02:18the sort of pretty chunky inflation readings we saw at the beginning of 2024 are going to be washed out.
02:23So once we get to the back end of this year,
02:25that's most likely going to be the time when we could see the Bank of England start to ramp up those rate cuts.
02:30But really, it depends on whether we do see that sort of bump in terms of inflation
02:34from some of those Labour policies that have been enacted.
02:37Germany's economy shrinking for a second consecutive year for the first time in more than 20 years, I think.
02:44In your view, why is that?
02:48Well, look, their manufacturing sector was the envy of the world for a long time.
02:53And certainly it felt like everyone wanted to drive a German car.
02:56Well, what happened was there was a breakdown between Ukraine and Russia.
03:00And of course, the closer you get to Russia, the more heavily reliant on Russian gas you become.
03:06And certainly in the UK, it's a problem. But certainly in Germany, it's a massive problem.
03:11And manufacturing is very energy intensive.
03:14And as prices rise and it becomes more difficult to get this energy imported from somewhere other than Russia,
03:23you get into a position where many of these highly energy intensive businesses just can't actually manage to operate.
03:31At the same time, as this big boom in terms of Chinese EVs the US is pushing,
03:37it feels like Europe, which has always been at the forefront of the automotive industry, has been lagging behind.
03:44And I don't necessarily see anything to point towards them suddenly making any sort of significant comeback.
03:51Joshua, good to see you. Thanks so much for coming on the programme again.
03:53Joshua Mahoney, Chief Market Analyst at Scope Markets in London.