19 June 2025: Rates are likely to remain at 4.25%

Several competing factors are contributing to the inflation picture in the UK currently, each with varying degrees of importance. With the Bank of England’s Monetary Policy Committee meeting in the same week as the data has been published, the fact that prices have been rising on an annualised basis at 3.4% for two consecutive months will be fresh in the minds of both analysts and the public, providing more scope for interest rates to be left unchanged after a cut of twenty five basis points last month.

Yesterday’s release from the Office for National Statistics matched forecasts in a Reuters poll of analysts, which the ONS has since said was overstated because of an error in car taxes.

The figure comes as the inflation outlook is further complicated by the intensifying conflict in the Middle East, which risks pushing oil prices higher. Economists said May’s data strengthened expectations that the Monetary Policy Committee would keep rates at 4.25 per cent. May’s figures were in line with the Bank’s expectations, so today’s release is unlikely to move the needle much for the Bank.

Declines in volatile air fares and fuel weighed on May’s rate, according to the ONS, which added that the biggest upward pressures came from food, furniture and household goods. The MPC, which has an inflation target of 2 per cent, has cut interest rates four times since last summer as it grapples with lacklustre growth and persistent price pressures.

Traders expect the Central Bank to deliver two more quarter-point cuts this year, with the next move coming in September, according to levels implied by the swaps market.

Services inflation, a key measure of underlying price pressures for rate-setters, slowed to 4.7 per cent in May, from 5.4 per cent in April. The services inflation reading was also in line with the BoE’s forecasts, but City analysts feel that this component remains too high for comfort.

The government’s decision to lift employer national insurance contributions, alongside increases in the minimum wage, has added to the costs faced by businesses.

The big picture remains that UK services inflation is proving more stubborn than that in other major economies due to policy-induced increases in labour costs,

Responding to the data, Chancellor Rachel Reeves said: “We took the necessary choices to stabilise public finances and get inflation under control after the double-digit increases we saw under the previous government, but we know there’s more to do.”

The Government has gone back to its old ploy of blaming the previous Government for the current state of the economy, although in the case of the HS2 fiasco, their criticisms are valid. Although they have continued the mismanagement of the situation by announcing further delays in the delivery of the project, well beyond its current deadline of 2032.

The pound remained in a narrow range between 1.3454 and 1.3422 yesterday as the market continued to digest the possibility of an escalation of the conflict between Israel and Iran, with U.S. President Donald Trump adding fuel to the flames, being coy about his intentions towards U.S. involvement in the bombing of Tehran.

Donald Trump took no time to comment on the Federal Reserve’s decision to leave interest rates unchanged at the end of its most recent meeting.

Trump labelled Fed Chair Jerome Powell a “stupid person” for not cutting rates when the Fed, he believes, has had ample opportunity with inflation, in his words, “tumbling”.

Policymakers maintained their “wait and see” approach on account of risks tied to tariffs, which means Jerome Powell is following the footsteps of the last three Fed chiefs, who all served a hawkish final year in the job.

“Powell’s reluctance to cut rates is classic final-year Fed Chair behaviour, but markets have a history of looking through this predictable rhetoric, and in any event, Powell has proven many times that he is 'cut from a different cloth' to his predecessors.

Greenspan, Bernanke, and even Yellen were prepared to provide the Administration with valid arguments for their actions concerning monetary policy, while Powell prefers to allow the data and market sentiment to speak for him. It is interesting to note that the stock market averaged a 15.9% return across each of those 12-month stretches of tightening and steady policy from previous Fed Chairs.

If we take the headline data affecting the Fed’s decision-making over the year so far as a guide, the lack of a rate cut so far has been entirely correct. Job creation is, if anything, stronger than usual at this point in the economic cycle, while price increases as measured by the wider Personal Consumption Expenditures fully justify the FOMC’s wait-and-see policy.

When the threat of tariffs and the conflicts in the Middle East and Eastern Europe are added to the mix, Powell and his colleagues are fully justified in the policy stance.

In his speech following the announcement of no change in interest rates, Powell said the Central Bank expects inflation to remain elevated and sees lower economic growth ahead. Still, the Federal Open Market Committee expects to make two rate reductions later this year, according to the closely watched “dot plot.”

However, it lopped off one reduction for both 2026 and 2027, putting the expected future rate cuts at four, or a full percentage point.

The plot indicates continued uncertainty from Fed officials about the future of rates. Each dot represents one official’s expectations for rates. Seven of the 19 participants indicated they wanted no cuts this year, up from four in March. However, the committee approved the policy statement unanimously.

Economic projections from meeting participants pointed to further stagflationary pressures, with participants seeing the gross domestic product advancing at a 1.4% pace in 2025 and inflation hitting 3%.

The dollar index is reacting to the changes in risk following the conflict in the Middle East and Trump’s rather bizarre comments about joining the Israeli attacks on Tehran.

The index rallied to a high of 98.98, a rally which has continued into early Asian trading.

European Central Bank President Christine Lagarde has called on Europe to take advantage of a unique moment to elevate the euro’s status on the global stage.

Speaking amid growing doubts about the US dollar’s reliability under Donald Trump’s erratic policies, Lagarde described this as a chance to promote a “global euro,” urging European leaders to act united and decisively to control their financial future.

She stressed that three core pillars must be strengthened for the euro to gain international prominence: geopolitical credibility, economic resilience, and strong institutions.

Lagarde highlighted Europe’s position as the world’s largest trading bloc, being the primary trading partner for 72 countries and accounting for nearly 40% of global GDP.

This translates into the euro’s current role as the currency behind about 40% of international invoicing. She argued that Europe should leverage this advantage by negotiating new trade agreements to expand the euro’s influence.

These three “core” pillars that need to be strengthened needed a great deal of work to render them as “reliable” as the dollar has been over the decades.

Geopolitical credibility is something that can only be gained in times of severe stress. The European Commission is never at the forefront of reaction in a geopolitical sense.

Taking the Russian invasion of Ukraine as a prime recent example, the reaction of Ursula von der Leyen and her colleagues has been lukewarm, bordering on reticent. The Commission receives virtually no support from the European Parliament, which is seen internationally as little more than a talking shop with little or no decision-making powers.

The Eurozone is still some way from proving its economic resilience. Again, it is fine when economic factors are in its favour, but when times get tough, as they did during the financial crises of 2008 and 2012, and more recently during the Pandemic, the entire region not only founders, but also shows its true colours by an overstated reliance on Germany.

The region’s largest economy showed what can happen if it is adversely affected, as it was over the past two or three years, when no other country was willing or able to step up to the plate.

France, the region’s next largest economy, is still in political disarray with a deeply unpopular President.

The third of Lagarde’s three pillars, strong institutions, is barely worth mentioning. The relative infancy of the EU means that there has been no Eurozone-wide institution that speaks for each member that has gained sufficient international recognition to even have a seat at the table.

If we look at the G7 as a current example. Germany, France and Italy are all members speaking for their own interests, while the EU is a co-opted member, having very little to say on the issues facing the world's strongest economies.

Sorry, Ms Lagarde, but Europe has a long way to go, possibly fifty or possibly one hundred years before it can even credibly challenge the U.S.

Size, as they say, is not everything.

The euro has had its toughest week for some time as risk aversion has seen the dollar gain favour. The single currency tried to rally but saw selling pressure around the 1.1520 level, which drove it back to close at 1.1465.

Have a great day!