3 June 2025: Bailey delves into Politics

In the past, Andrew Bailey has studiously avoided involving himself in politics, preferring to “play the hand he is dealt” by Government, whether dealing with the inflationary consequences of fiscal policy or promoting growth through easing interest rates.

However, he now feels justified in advising the Cabinet on how to achieve economic growth or mitigate the negative yet justified effects of their policies.

Providing a stark message to the Cabinet, Bailey has encouraged the UK government to go faster and further with its EU reset deal, in order to counteract the downsides of Brexit.

The Governor openly addressed the ‘negative effects’ of Brexit, stating that the UK now faces ‘more uncertain supply-side conditions’.

“Brexit has weighed on the UK economy. This does not mean that Brexit is wrong, because there can be other reasons for it, but it does suggest, I think powerfully, that we should do all we can to minimise negative effects on trade.”

“The inevitable conclusion is that we cannot assume the supply sides of our economies behave as efficiently as they did before. Our jobs are much harder if we face more inflexible and uncertain supply-side conditions in our economies, as we appear to do today.”

While broadly in favour of Sir Keir’s recent deal, Bailey has warned that the current tariff chaos being wreaked by the US and President Trump emphasises the need for the UK to pull out all the stops and continue to rebuild ties that were damaged as a result of Brexit.

“I think the current situation does emphasise the need for the UK to align itself further with the EU by doing everything we can to rebuild the relationship. The agreement with the EU is a good thing. Even with the UK-US agreement, we will still have tariffs higher than before this all started.”

Monetary Policy Committee Member Catherine Mann, on a visit to her homeland, spoke yesterday at an event in Washington, DC. She believes that policy in the US is a contributing factor to high volatility in UK assets, and that the 10-year gilt is being impacted heavily by spillover from the US, while QT can offset some of the impact of Bank of England rate cuts at the long end.

Meanwhile, her MPC colleague Megan Greene told reporters that wage and inflation measures were moving in the right direction but remained too high and that she was worried about rising public inflation expectations.

"What's a little bit more worrisome for me is that medium-term inflation expectations have also started picking up.

The pound started the week positively as the market waited for the next move from President Trump. It climbed to a high of 1.3557, but as has been seen on several occasions recently, it saw a correction in early trading in Asia with traders unwilling to add long positions at such elevated levels.

Lorie Logan, the President of the Dallas Federal Reserve, spoke yesterday of her view that with the labour market stable, inflation running somewhat above target, and the outlook uncertain, the Federal Reserve must keep a watchful eye on a broad range of data to judge what response might be needed.

"Monetary policy is currently really well positioned for us to wait and be patient and watch the data, knowing that if the risks are to materially change on either side, we're in a position to act," Logan said at a banking conference. "Our job is to ensure that a one-time increase in the price level doesn't become an ongoing, persistent problem of inflation."

The inference of her words is that the imposition of tariffs is a binary issue, with them either being added or not, and the effect will be a one-off.

Logan's remarks echo those of many of her rate-setting colleagues who expect U.S. President Donald Trump's tariffs to push up both unemployment and inflation, potentially putting the Central Bank in the difficult position of needing to pick which battle to prioritise.

Fed policymakers next meet in about two weeks and are widely expected to leave short-term borrowing costs in their current 4.25%-4.50% range, where they have been since December. Financial markets aren't expecting a rate cut until September, based on pricing of short-term interest-rate futures contracts.

For Logan, inflation data is "first and foremost" in her sights. The Fed's target for inflation is a 2% year-over-year change in the personal consumption expenditures price index; data released last week showed PCE inflation was 2.1%.

She noted Dallas Fed surveys that show half of businesses expect to raise prices to consumers because of the higher import duties. Households and businesses expect inflation to rise in the short term, surveys show.

"The key risk to our outlook is that those higher expectations for inflation from tariffs or other potential shocks extend well past the period of those shocks affecting the economy, and then the risk is that those expectations become entrenched," Logan said.

Tariffs themselves, uncertainty over national economic policies, and resulting financial market volatility may also slow the economy, Logan said. So far, she said, the labour market has stayed in balance, and the economy has been stable.

Logan appeared to want to avoid use of the word, but what she describes is a brief period of stagflation as inflation rises and the economy fails to exhibit any worthwhile growth.

Chicago Fed President Austan Goolsbee has taken on the role of mouthpiece for the FOMC over recent months, making an inordinate number of speeches, and his message is unwavering.

Goolsbee says that while the United States may be heading towards stagflation, there is still a strong economy hidden underneath a layer of uncertainty.

Speaking at last week’s Mackinac Policy Conference, Goolsbee pointed to low unemployment rates and inflation hitting targets to suggest that rates should be “well below where they are today” in the medium to long term.

But he said that’s at risk due to the uncertainty caused by constantly shifting Federal economic policies, like President Donald Trump’s will-he-won’t-he approach to tariffs, which he said Michigan is the most exposed state to in the country.

“If we can get the dust out of the air, I do still think that underneath there is a strong dual mandate economy,” Goolsbee said, referring to the Fed’s responsibilities to stabilise prices and maximise employment. “The longer we go contemplating massive changes, like some of the ones that have been discussed, the more that fades into the background.”

The dollar index lost further ground yesterday as it fell close to its medium-term support level. It fell to a low of 98.66 and rallied only marginally, pointing to a possibility of further weakness to come.

Traders will begin to “clear up” long-standing positions over the rest of the week in preparation for the publication of the May employment report.

The speculation that Christine Lagarde will choose to leave her post as President of the European Central Bank before the end of her official term has inevitably led to speculation about who will replace her.

Among the technocrats, Philip Lane, the Bank’s Chief Economist, is favoured, particularly since he is an ex-Governor of the Bank of Ireland. However, another Irishman's name is continually being mentioned. That of Paschal Donohue, the current Irish Finance Minister.

Donohue has come to prominence recently as the Minister with the closest relationship with the U.S. Administration, as he tries to balance the relationships that U.S. multinationals have with the Irish State with the need to find growth in other areas.

The Irish economy is not heading towards recession, despite the effect of tariffs placed on exports to the US by the Trump administration, a Department of Finance report has forecast.

There is no doubt that Lane has serious admirers, given his reputation for providing a balanced view of the need for the ECB to act based on data and not become entrenched in the need to be constantly changing monetary policy.

He is seen as a conciliatory voice balancing the views of his more hawkish colleague, Isabel Schnabel.

However, if the ECB wants a more charismatic President, they may well go for Donohue, who appears more than able to tread a cautious yet tough path when dealing with the U.S.

Speaking recently, Donohue was quoted as saying that the European Union will do all it can to engage with the U.S. on trade and reduce the massive uncertainty that is weighing down the global economy.

What we are trying to do in our engagement with the U.S. through the European Commission is try to identify ways in which we can reduce that uncertainty and find a way of reaching an agreement," Donohoe told Reuters during the spring meetings of the International Monetary Fund and World Bank in Washington.

The latest inflation data will be released later this morning. It is expected that the headline data will again have fallen, reaching the ECB’s 2% target. However, this will bring further speculation about the meeting of the Governing Council, which begins tomorrow and concludes on Thursday.

There will be those who feel that their work is done, and the time has come for a pause, but others will feel that the uncertainty created by Donald Trump’s threatened imposition of tariffs and the volatility of the Euro make another cut both necessary and possible.

The single currency exhibited further strength yesterday as it reached a high of 1.1453. It has gradually drifted lower early in the Asian day, with traders becoming used to arriving at the office to see the dollar trading at recent lows.

Have a great day!