12 March 2025: Reeves is facing another black hole

It is believed that the Chancellor is facing another black hole in the nation's finances resulting from higher Government borrowing than predicted following last Autumn’s Budget.

The Prime Minister was preparing the country for welfare cuts when he told a meeting of Labour MPs on Monday evening that the current welfare system is both indefensible and unfair.

The Minister responsible is expected to deliver plans to encourage those with disabilities back to work, in a move that is hoped to cut welfare spending by up to £2.5 billion.

Starmer has seemingly been forced to delay his plan to cut benefits after being spooked by a potential Labour rebellion.

Backbench MPs have told the Prime Minister that his proposals feel like a return to austerity, and that is not the reason they joined the Labour Party.

The UK is expected to avoid the imposition of tariffs on its exports of steel and aluminium to the U.S., and President Trump doubled the tariffs on the same raw materials imported from Canada.

Apparently, the products imported from the UK form part of a niche market and are not available elsewhere.

Liz Truss claimed that the UK was “heading for bankruptcy” in her latest strange comments. About the British economy. Truss, who spends an increasing amount of time in the U.S. following the loss of her parliamentary seat in the General Election, was reacting to a question about her relating to her relationship with incoming Canadian Prime Minister Mark Carney.

The former Prime Minister, who was forced to resign after just 49 days over her £45bn of unfunded tax cuts, also claimed, without irony, that Rachel Reeves’ economic plans had been a “disaster”.

Truss said: “Under Carney’s tenure, too much money was printed, which did damage to the British economy, and put our economy off track.”

Truss is concerned that Carney’s undoubted support for Reeves will harden her attitudes to disciplined borrowing and ensuring that the nation’s books are balanced.

Dr Swati Dhingra delivered what might have seemed an unlikely rebuke to one of Britain's most venerated institutions. Speaking at the Bank of England (BoE) Watchers’ Conference, she challenged the Office for National Statistics (ONS) claims about the difficulty of gathering reliable labour force data in the UK.

“I grew up in India. There are a billion people there. We managed to get the labour force survey answered," she said, her typically measured tone carrying an edge of frustration. “I don't find it particularly plausible that that's hard to do.”

This moment exemplifies what makes Dhingra, the first South Asian woman appointed to the Bank of England’s Monetary Policy Committee, such a compelling force in British economic policy. She combines deep expertise with an outsider's perspective, challenging conventional wisdom with data-driven precision and lived experience.

Her comments show the positive effect of having independent members co-opted into the MPC. Dhingra’s colleague and now partner in arms have shown that radical and original thinking may be the way forward for monetary policy.

The pound has run into strong selling pressure on the approach to the 1.30 level. Yesterday, it climbed to a high of 1.2966 and closed at 1.2950 as President Trump continued his attacks on America’s trading partners but pulled back from the brink over some tariff plans.

Since he took over in mid-January, Donald Trump has made the role of the Federal Reserve increasingly difficult. It is nigh on impossible to be anything other than reactive when the Commander-in-Chief keeps moving the goalposts.

For this reason, the Federal Reserve is considered certain to leave interest rates unchanged at its March meeting, which takes place next week and the one due in May.

At some point, Trump will turn his attention to the Fed and its Chair, Jerome Powell, with whom he has a “prickly” relationship.

The comments that emanate from FOMC members following next week’s meeting will show how they feel about the current handling of the economy.

For his part, Trump will certainly call for interest rates to be cut at some point, and if the FOMC is considered to be too inflexible in reacting to Government Policy he may consider co-opting a member of his Administration onto the FOMC which has had the same or similar makeup for decades.

Trump has long been jealous of the Federal Reserve's power over the American economy. With stocks falling and tariffs rising under Trump's watch, however, the world's financial experts are looking to see how the Fed responds to sudden instability.

Powell plans to "remain cautious" about making any big policy changes, at least for now, The Washington Post's economic adviser believes. The Fed does "not need to be in a hurry" to respond to the president's flurry of actions that have heightened uncertainty in the markets,

Powell said Friday. Instead, "we are focused on separating the signal from the noise as the outlook evolves." The Fed is "well positioned" to handle the "risks and uncertainties" of the new economy, he added.

Powell has a record of becoming reactive when faced with “unusual” situations. He learned a salutary lesson when labelling rising inflation as transitory rather than reacting to what was in front of him at the time.

He has the full support of the twelve Regional Fed Presidents, who have each said, in their way, that there is no pressure to cut rates. No one in the Central Bank is reacting to talk of a recession, particularly since they see inflation above their 2% target and robust employment data being published.

Canadian Prime Minister Mark Carney’s tenure may be short-lived, he is about to call a General Election to allow the public to judge his, and his party’s, credentials to stay in power, but he is planning to make the most of the challenge.

Carney reacted to the threat of 25% tariffs on Canadian exports of steel and aluminium to the U.S. by placing a 50% tariff on U.S. imports of electricity from Canada. Trump reacted by doubling the proposed tariff. The market awaits Carney’s response since he is unlikely to back down.

The dollar continued its path lower, touching the low it made just before the U.S. election. It reached a low of 103.23 and closed at 103.40.

While Christine Lagarde's influence as the President of the European Central Bank has been eclipsed by the return to Brussels of her predecessor, Mario Draghi, it has been left to two members of the Bank’s board and Governing Council to provide their insights into the future of the economy and how further rate cuts fit into that scenario.

Philip Lane the Bank’s Chief Economist believes that rates are “two cuts away from reaching neutral, where they are neither supporting nor restricting growth, while his colleague Isabel Schnabel believes that rates are at, or very close to neutral already, and the ECB is running the risk of creating an inflationary bubble of its own making.

Lane recently cast doubt on the importance of the neutral rate, which is after all a theoretical level that neither limits nor spurs demand in the economy.

A recent study concluded that the neutral rate is between 1.75% and 2.25%. That was considered by the market to be the level at which rate cuts would end. With Rates having been cut to 2.75% recently, the top of the neutral level could still be two cuts away.

It has been said many times, but the next meeting of the Governing Council could be a watershed in monetary policy. There may be enough hawkish voices to see rates left unchanged, while the economy reacts to the turmoil that has been created recently.

Trump’s “initiatives” are creating an artificial tidal wave which could turn into a tsunami if left unchecked. It is artificial since there is no need to disrupt global trade flow even as he uses his usual rhetoric of trying to “make America great again.

ECB President Christine Lagarde has reiterated the central bank’s cautious stance on how to use frozen Russian assets, but opposition is growing at the Russian frontier.

Cracks are appearing in the European Central Bank's united front as the urgent need for cash to rearm Europe threatens to overpower legalistic and technocratic concerns about how the single currency should be managed.

The implicit withdrawal of American security guarantees from Europe last week following a heated Oval Office clash between United States President Donald Trump and Ukrainian President Volodymyr Zelenskyy has sent European leaders scrambling for ways to bolster defence spending quickly.

Largely strapped for cash and already groaning under heavy debt burdens, Europe’s politicians are now mulling whether to seize some €200 billion in Russian central bank reserves currently frozen in Belgium and being used as collateral for a €50 billion loan from the G7 to Ukraine.

On Friday, Mārtiņš Kazāks, Governor of the Bank of Latvia, was the first member of the ECB’s Governing Council to endorse the move for outright seizure.

He told reporters following the ECB meeting last week that it was a “viable option to help Ukraine in its fight for freedom and against aggression.”

It will take a significant amount of discussion in Frankfurt, Brussels and Paris, among other regional capitals, before such a proposal is acted upon.

Meanwhile, the Euro edges ever closer to the elusive 1.10 level. There was significant congestion the last time it was between 1.09 and 1.11 and a similar scenario is likely this time. Yesterday it rose to a high of 1.0947 and closed at 1.0918.

Have a great day!