Russia's Rate Cut Path Clouded by Inflation Fears

Source: cnbc

UK Prime Minister Keir Starmer has declared that his government will not be forced to pick a side between the United States and China, emphasizing a dual approach of maintaining close ties with Washington while actively engaging with Beijing. His comments signal a key foreign policy direction ahead of his planned visit to China.

Starmer confirmed that the UK will preserve its strong security, business, and defense relationship with the U.S. However, he argued that "sticking your head in the sand and ignoring China" is not a viable strategy.

A Push for Economic Ties with Beijing

The Prime Minister's planned state visit to China—the first by a UK leader in eight years—is framed as a move to unlock major economic benefits. Starmer stated the trip could create "significant opportunities" for British companies and is expected to include a delegation of UK business leaders for stops in Shanghai and Beijing.

Addressing potential security concerns, Starmer insisted that building a relationship with China "does not mean compromising on national security – quite the opposite."

This diplomatic outreach follows the UK government's recent and controversial approval for China to establish a new embassy in London. The decision proceeded despite opposition concerns that the facility could be used for espionage activities against the United Kingdom.

Navigating US Trade Friction

Starmer’s balanced approach comes amid a backdrop of global trade tensions, particularly involving the United States under President Trump. The Prime Minister's visit to China could risk friction with Washington, which has previously threatened allies over their economic ties with Beijing.

Trump's Tariff Threats on Allies

President Trump has shown a willingness to use tariffs to enforce his foreign and economic policy goals. In one instance, he threatened to impose tariffs on allied nations that opposed the U.S. acquisition of Greenland, stating, "we need Greenland for national security." While tensions later subsided after Trump clarified he would seek negotiations rather than use force, the episode highlighted his transactional approach.

More directly, Trump threatened Canada with a 100% tariff after the country reached a "strategic partnership" trade deal with the Chinese government. The threat emerged after Canadian Prime Minister Carney's speech in Davos was perceived as critical of the U.S. world order.

The Canada-China agreement included several key tariff reductions:

• China would lower levies on Canadian canola oil from 85% to 15%.

• Canada would cut taxes on Chinese electric vehicles from 100% to 6.1%.

Pressure on South Korea

The U.S. has also applied economic pressure on other key partners. Trump threatened to raise tariffs on South Korean goods from 15% to 25%, targeting products like automobiles, lumber, and pharmaceuticals. He accused South Korea of failing to honor a trade deal struck the previous year.

The announcement caused a sharp reaction in South Korea's stock market, particularly affecting carmakers. In response, Seoul urged Trump to reaffirm his commitment to their trade agreement, under which President Lee Jae Myung had agreed last July for South Korea to invest $350 billion in the United States.

China total crude available vs refinery throughput

Source: reuters

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MARKET WRAPS

Source: morningstar

The European Union’s competition chief has issued a sharp warning against becoming overly dependent on liquefied natural gas (LNG) from the United States as the bloc works to secure its energy future.

"We know that we cannot rely on Russian gas, and that we should pay attention not to rely too much on American gas," Teresa Ribera said in a radio interview on Tuesday.

This cautionary stance comes as Europe rapidly pivots away from its former primary supplier, Russia, following the invasion of Ukraine.

The Scale of the Shift to US Energy

To replace lost volumes of Russian gas, European nations have increasingly turned to US LNG. This shift is solidified by a major trade agreement with Washington, which includes a commitment to purchase $750 billion in American energy by 2028.

The momentum is significant. A recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) projected that if current supply deals are fulfilled and gas demand reduction efforts lag, the US could account for as much as 80% of Europe's gas imports by 2030. This would be a substantial increase from a projected 57% in 2025.

Even as the EU diversifies, Russia remains a key player, currently providing about 15% of the bloc's LNG supplies and standing as its second-largest provider after the United States.

Concerns Over a New Dependency

Top officials are openly cautioning that trading one dependency for another is not a sustainable long-term strategy.

"One of the reasons why we need to produce much more of our own energy is that it is not good to be reliant on any country in the world fundamentally for our energy supply," EU energy chief Dan Jorgensen told reporters. He added, "we need to be very careful that now we're moving out of Russian energy, that we're not replacing that dependency with other dependencies."

These concerns are amplified by geopolitical uncertainties. Past actions by former US President Donald Trump, including his interest in Greenland's mining rights and threats of tariffs against European nations, serve as a reminder of the political risks associated with over-reliance on a single partner.

Europe's Broader Energy Strategy

The EU's overarching goal remains a complete phaseout of Russian gas. To achieve true energy security, the bloc is focused on a two-pronged approach: seeking a diverse range of alternative suppliers while simultaneously accelerating its own transition to renewable energy.

This strategy is designed not only to secure its energy supply chain but also to meet the continent's ambitious climate target of achieving zero emissions by 2050.

The National Bank of Hungary has held its benchmark interest rate at 6.5%, opting for a wait-and-see approach as it looks for more conclusive evidence that slowing inflation is sustainable.

This marks the 16th consecutive month the rate has remained unchanged, tying with Romania for the highest in the European Union. The decision, announced on Tuesday, was in line with the forecasts of 22 out of 23 economists surveyed by Bloomberg.

A Cautious Shift in Monetary Policy

Hungary's central bank recently adjusted its policy guidance. After previously ruling out rate cuts, policymakers now state that decisions will be made on a meeting-by-meeting basis, driven entirely by incoming economic data. The bank's projections indicate that inflation is expected to return to its 3% target, plus or minus a one percentage point tolerance band, over the monetary policy horizon.

However, despite headline inflation slowing in December and moving closer to the target, officials remain cautious. Deputy Governor Zoltan Kurali highlighted a key concern on January 14, pointing to "stubborn" price increases in the services sector, a critical indicator of underlying inflation expectations.

At an annual rate of 6.8%, services inflation was more than double the headline figure last month. Kurali noted that policymakers would need "a lot of conviction" before they could begin cutting rates.

All Eyes on February Inflation Data

With the central bank holding firm for now, market focus is shifting to the next policy meeting in February. A crucial factor in that decision will be the January inflation report, scheduled for release by the statistics office on February 12.

This data will provide the first clear picture of how businesses, particularly in the services industry, have repriced their offerings at the start of the new year.

Market Expectations and Currency Headwinds

Money market traders are already positioning for a change in policy. According to forward rate agreements, investors are anticipating one or two quarter-point rate cuts within the next three months, with the first potentially coming as soon as February.

Adding another layer to the bank's decision-making is the strength of the Hungarian forint. The currency is trading near a two-year high against the euro, buoyed by a broader emerging-market rally and a weaker U.S. dollar. A stronger forint helps to lower the cost of imported goods, including energy, which eases inflationary pressures and gives the central bank more room to consider rate cuts.

This economic maneuvering occurs ahead of parliamentary elections scheduled for April 12, where Prime Minister Viktor Orban's party is reportedly trailing in most polls after 16 years in power.