To be continued

Market recap

In the first quarter of 2025, the global macroeconomic landscape showed distinct regional characteristics, yet common threads tied together developments in the US, UK, and the Eurozone. Across these major economies, central banks pursued monetary easing, while grappling with cooling inflation and concerns about economic growth, all against the backdrop of rising geopolitical tensions.

The key theme across all three regions was a reduction in short-term interest rates, as central banks responded to moderating inflation and slowing growth. The European Central Bank (ECB) was the most aggressive, cutting its deposit rate by 25 basis points to 2.50% in March, continuing its easing cycle that began in mid-2024.

Meanwhile, the Bank of England (BoE) maintained its Bank Rate at 4.50%, with a division within the monetary committee hinting at potential future cuts.

Similarly, the US Federal Reserve held its rates steady at 4.25-4.50%, signaling caution despite ongoing inflation concerns. The pace of easing differed across regions, with the ECB showing a more dovish stance compared to the more cautious Fed and BoE.

Inflation, which had soared in 2022, has been a focal point in each region’s economic management, and by Q1 2025, inflation had notably eased in the G7 countries, falling to 2.6%. This drop, driven largely by softening goods prices and normalization of supply chains, contrasted with regional growth dynamics.

The Eurozone's economic data was weaker than anticipated, with GDP growth forecasts revised downwards, highlighting concerns over productivity and long-term growth potential.

The UK, although facing rising inflation (3.0% in January), showed some resilience with a modest GDP increase in January, while the US economy outperformed expectations in 2024 but showed signs of slowing, with GDP growth forecast to decelerate in 2025.

One of the significant challenges in Q1 2025 was the announcement of new US tariffs, which created volatility and raised concerns about global trade. These tariffs, particularly on automobiles, impacted both the EU and the UK, while contributing to inflationary pressures in the US. The EU retaliated with counter-tariffs, further intensifying trade tensions. As the quarter closed, the US, UK, and Eurozone were navigating similar issues: inflation control, slowing growth, and the complex dynamics of global trade. The US exhibited stronger growth but faced risks from tariffs, the Eurozone struggled with weak growth and aggressive easing, and the UK presented a more balanced picture, showing resilience despite higher inflation. The divergent approaches of their central banks and the geopolitical backdrop suggested that 2025 would be a year of complex macroeconomic interactions, with continued uncertainty around trade, inflation, and growth in each region.

Source: BlackRock’s opinion using Bloomberg data as of 31 March 2025.. The opinions expressed are as of 31 March 2025 and are subject to change at any time due to changes in market or economic conditions. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

Ongoing efforts by the Federal Open Market Committee (FOMC) to normalize monetary policy amid persistent inflation dynamics and a relatively stable labor market characterized the final quarter of 2024.

Over the quarter, the FOMC reduced the federal funds rate at each of its meetings, adopting a cautious and data-dependent approach to monetary adjustments.

In October, the FOMC implemented a significant 50 basis point rate cut, followed by smaller reductions of 25 basis points in both November and December. By the end of the quarter, the federal funds rate range stood at 4.25–4.50%. These decisions were aimed at balancing the need to support economic growth with the broader objective of achieving price stability. Chair Powell reiterated the committee's cautious stance, emphasizing that additional rate cuts would be contingent upon further progress toward the 2% inflation target.

Despite progress in reducing inflation earlier in the year, persistent inflationary pressures remained a central concern during Q4. As shown in Chart 9: Inflation Rate, the Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, indicated elevated levels that continued to challenge policymakers. While headline inflation reflected significant improvements, with the annual inflation rate measured by the Consumer Price Index (CPI) reaching 2.7% for the 12 months ending November 2024, the core inflation measure suggested that disinflationary momentum might be stalling above the target level.

Economic data released throughout the quarter played a crucial role in shaping FOMC policy decisions. The relatively healthy labor market provided some room for cautious monetary easing, but inflation's persistent dynamics tempered the pace of rate cuts. Market expectations aligned with the FOMC's measured approach, reflecting fewer anticipated rate reductions over the coming year. This adjustment underscores the Federal Reserve’s commitment to a carefully calibrated path toward a neutral monetary stance, ensuring economic growth is not jeopardized while maintaining focus on stable inflation.

The Federal Reserve’s careful and data-driven approach highlights its commitment to long-term economic stability. As Chair Powell noted, the decision to slow the pace of rate reductions reflects the importance of ensuring that inflationary pressures are fully under control before concluding monetary tightening. This strategy aims to provide a stable and predictable environment for economic growth, even as uncertainties around inflation and labor market dynamics persist.