Australian Bond Exchange Weekly Update
28th February 2025
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate decreased by 0.25% to 4.10% per annum, with January’s annual inflation at 2.5% (trimmed mean 2.8%).
- The Federal Reserve’s cash rate is currently between 4.25%–4.50% per annum, with annual inflation at 3.0% as of January.
- United Kingdom: The Bank of England reduced the Bank Rate to 4.50% per annum to manage an inflation rate of 2.5% in the year to December.
- Europe: The European Central Bank (ECB) deposit facility rate is 2.75% per annum, with inflation at 2.4% over the same period.
January Monthly CPI Indicator Gains 2.5%
Australia’s Consumer Price Index (CPI) remained steady at 2.5% year-on-year in January 2025, unchanged from December. However, core inflation, measured by the trimmed mean, inched up to 2.8% from 2.7%, signalling persistent underlying price pressures.
On a monthly basis, CPI dipped by 0.2%, primarily due to declines in housing costs and holiday travel expenses. Key contributors to annual inflation included:
- Food and non-alcoholic beverages: +3.3%
- Housing: +2.1%
- Alcohol and tobacco: +6.4%
These increases were partially offset by an 11.5% year-over-year drop in electricity prices.
While inflationary pressures remain, the latest figures suggest a gradual stabilization, potentially giving the Reserve Bank of Australia (RBA) more flexibility in shaping future monetary policy.
Fitch Rating Agency Warning – Trade War Risk Rises for Global Credit Outlook
Fitch Ratings has warned that the risk of a global trade war has increased, with the Trump administration adopting a more aggressive US trade policy. If fully enacted, proposed US tariffs could trigger retaliatory measures, negatively impacting global economic growth. Mexico and Canada are among the most exposed economies.
Beyond trade, US policy shifts—including deregulation, tax cuts, and changes to immigration and climate policies—could have wide-ranging effects on credit markets, affecting issuers and sectors differently.
Japan CPI Hits 2-Year High, Raising Expectations for More BOJ Rate Hikes
Japan’s CPI surged to a two-year high of 4.0% year-over-year in January, up from 3.6% the previous month. Core CPI, which excludes fresh food, grew 3.2% y-o-y, surpassing expectations of 3.1%.
The Bank of Japan’s key inflation measure, excluding both fresh food and energy, rose slightly to 2.5% y-o-y, remaining above the 2% target. This sharp rise in inflation, fueled by strong consumer spending and rising food prices, increases the likelihood of further interest rate hikes.
BOJ board member Naoki Tamura has suggested that the central bank’s benchmark rate could rise by another 50bps to 1% in 2025 as part of its tightening cycle.
German Election – CDU/CSU Leads, SPD and Greens Suffer Losses
Germany’s Christian Democratic Union/Christian Social Union (CDU/CSU), led by Friedrich Merz, won 28.5% of the vote, securing 208 out of 630 seats in the Bundestag. This marks their second-lowest performance since 1949.
The Social Democratic Party (SPD), led by outgoing Chancellor Olaf Scholz, saw a sharp decline, securing only 16.4% of the vote and 120 seats, down from their previous standing.
The far-right Alternative for Germany (AfD) surged to second place, creating challenges for coalition negotiations.
Despite political uncertainties, Maximilian Kunkel, CIO for Germany at UBS, believes the outcome could lead to a business-friendly, reform-driven government, boosting investment confidence and economic stability in the EU.
Europe’s TTF natural gas benchmark had risen to €59 per MWh ($19.50 per mmBtu)—the highest level since February 2023. This marks the fourth consecutive week of price increases in early 2025. If wind generation remains inconsistent, reliance on alternative energy sources, including natural gas, could persist, further impacting energy prices and inflation across the region.
Final Thoughts
This week’s developments highlight the ongoing balancing act between economic growth and inflation control. With Japan’s rising inflation, trade war risks, and Germany’s political shifts, investors should closely monitor global trends for potential impacts on financial markets.
Stay tuned for next week’s update as we track the latest market movements.
ABE Monthly Webinar
Watch the latest edition of ABE’s Monthly Markets Webinar, where we break down the key economic trends shaping today’s fixed-income markets. Our experts discuss the Reserve Bank of Australia’s (RBA) cash rate update, what it means for investors and market stability, and whether the yield curve normalisation signals a warning or an opportunity.
*Data accurate as at 28.02.2025
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