25 June 2025: BoE’s Bailey sees more signs of a softening labour market

Bank of England Governor Andrew Bailey has been happy to avoid media questioning over the past few months, only really interacting with reporters following an interest rate decision from the Monetary Policy Committee. This differs from the performance of other G7 Central Banks and makes his speeches more meaningful.

Jerome Powell is constantly bombarded with questions given both his prickly relationship with the U.S. President Trump and the infatuation with the performance of the Federal Reserve. At the same time, Christine Lagarde is a “media junky” who seems never to turn down an opportunity to give her opinion on several issues that have only a tenuous relationship with the ECB.

Bailey appeared before the House of Commons Treasury Select Committee yesterday and was keen to talk about changes in the labour market. He told them that there were now signs that Britain's labour market was softening, and he repeated his view that interest rates are likely to continue falling.

Earlier, Deputy Governor Dave Ramsden struck a firmer line on the labour market, saying there were clear signs of weakening and that he was now more worried that inflation could fall below the central bank's forecasts.

Bailey said that interest rates remain restrictive, and he added that he was not in a position to provide a view on the decision of the next MPC meeting, which takes place in August. “There is a great deal of uncertainty and speculation around the global economy, and Central banks need to be careful not to add fuel to the flames”, he said

The BoE left interest rates on hold at 4.25% this month, although three of the nine members of the Monetary Policy Committee, including Ramsden, voted to cut interest rates.

The Chancellor is said to be considering how she can make up for the lost revenue from the number of vehicles on the road that either pay no, or a reduced level of fuel tax, having switched to fully electric or hybrid cars.

As the Government pushes forward with its promotion of electric cars, the impact on the economy has been dire, research has revealed. The latest HMRC tax receipts data found that while fuel duty receipts for April to May 2025 reached £4.1billion, marginally higher than the previous year, the annual trend shows a continued decline.

Rachel Reeves is said to be considering introducing a new tax on electric vehicles, which is bound to be hugely unpopular with drivers who have made the switch.

Kemi Badenoch has offered to rescue Sir Keir Starmer from his own Labour backbenchers after a massive rebellion threatened to bring down his welfare reforms.

In a late intervention on Tuesday evening, the Tory leader stepped in to say her party would back the swingeing cuts to benefits, as more than 100 Labour MPs were gearing up to reject the plans when they are voted on next week.

It came after the defiant PM hit back at Labour rebels, warning that “those who care about a future welfare system” must support the legislation. However, warnings have already been made by critics in Labour and the trade unions that it would be “shameful” of him to rely on Tory votes next Tuesday to get the legislation needed to slash benefits passed.

Turning to the subject of the American action in attacking Iran’s uranium enrichment sites, the Prime Minister said the US had helped in “alleviating” the threat of nuclear capability for Tehran.

Ministers have been at pains to stress Britain was not involved in the attacks, but Sir Keir on Tuesday gave his backing to Washington’s course of action as he prepared to meet the US president at a major summit of NATO allies.

The financial markets have adopted a “risk on” approach following the tenuous cease-fire that Donald Trump has forced upon both Israel and Iran.

The pound reached a high of 1.3640 yesterday and closed at 1.3614.

Jerome Powell remains sanguine in the face of further criticism from Donald Trump, even as some of his colleagues on the FOMC have tentatively come around to the President’s way of thinking. Fed Governors, Michele Bowman, who owes her elevation to Trump’s patronage and Christopher Waller, have said that they see the possibility of a rate cut at the August meeting.

Meanwhile, the Fed Chairman said yesterday that President Trump's tariffs pave a "highly uncertain" path for the U.S. economy, which warrants the central bank's wait-and-see approach to cutting interest rates.

"We do expect tariff inflation to show up more," Powell told the House Financial Services Committee. "But I want to be honest, we don't know how much of that's going to be passed through to the consumers. We just don't know. And we won't know until we see it. It could be lower than we expect; it could be higher. We have to wait and see, which is kind of what we're doing."

Powell has been facing an ever-increasing tirade of abuse from the President as he continues to refuse to bend to his will, relying on the independence of the Central Bank.

Following last week's interest rate decision, several members of the FOMC have been explaining the motives behind their decision, and they have been mostly supportive.

Federal Reserve of Chicago President Austan Goolsbee expects interest rates to decrease, but cautions that more clarity on inflation is needed. Speaking to hundreds of business leaders at a Milwaukee Business Journal Mid-Year Outlook event, Goolsbee addressed the pressing question on many minds: When will interest rates go down?

He noted that while inflation is slowly moving in the right direction, and unemployment remains stable, recent tariff discussions have given him and his colleagues pause.

"I expect rates to go down from where they are now, by a fair amount, but we just have to be sure we are not going back to unfavourable conditions," Goolsbee said.

As one of 12 voting members who help set the nation's monetary policy, Goolsbee expressed particular concern about tariffs' impact on manufacturing-dependent states like Wisconsin.

"If you look at the most exposed states to tariffs - four of the seven most exposed states are in the Chicago district - including Wisconsin, I think Wisconsin is number four or five," Goolsbee said.

But he added: “Somewhat surprisingly, thus far, the impact of tariffs has not been what people feared.”

Goolsbee also addressed political pressure from former President Trump to cut rates immediately, emphasising the importance of the Federal Reserve's independence.

"It is basically unanimous among economists that central bank independence from political interference is critically important," Goolsbee said.

Meanwhile, Minneapolis Fed President Neel Kashkari said the US Central Bank needs more clarity on how tariffs will impact prices before adjusting policy, even as recent inflation data has been “quite positive.”

The dollar has lost ground following the marginal lowering of tensions in the Middle East. Yesterday, it fell to a low of 97.80 and closed at 97.90.

The ECB’s two most prominent exponents of economic common sense agree that the ECB has reached the end of its most significant cuts in interest rates, and all that is left is to “mop up” any supplemental falls in inflation.

ECB Chief Economist, and several people’s choice to replace Christine Lagarde given his similarity to Mario Draghi’s pragmatism, Philip Lane commented yesterday that the European Central Bank’s main task in the months ahead will be to make sure that changes in key prices don’t have a long-lasting impact on inflation.

There has been sufficient progress in returning inflation to target to consider that this policy challenge has reached its conclusion.

However, when one door shuts, another opens, and the Central Bank now faces fresh challenges, including the effect of tariffs, which are currently under negotiation, on growth and economic activity. Furthermore, the escalation that we have witnessed in the Middle East over the past few days is bound to have a lasting effect.

Policymakers need to be nimble on their feet to deal with fresh challenges, but also need to ensure that short-term fixes do not become long-term policy actions.

This means that the ECB needs to set medium and long-term targets for inflation even as price changes fall well below its target in the short term.

Lane’s long-term sparring partner Isabel Schnabel agrees. She signalled that the central bank’s monetary easing cycle is “coming to an end,” citing stable medium-term inflation forecasts and improving macroeconomic conditions.

Speaking with notable confidence, Schnabel downplayed the expected dip in inflation, projected at just 1.6% in 2026, as a “temporary deviation” caused by energy base effects and a stronger euro.

Schnabel painted a relatively constructive picture of the Eurozone economy, stating that growth remains “broadly stable” even as global trade tensions intensify. Private consumption continues to provide a key pillar of support, while both manufacturing and construction sectors are showing signs of recovery. She also highlighted that “additional defence and infrastructure spending counteract tariff shock on growth”.

In her view, these structural shifts, combined with a resilient Euro and outperforming equity markets, reflect a “new European growth narrative” that could elevate the region’s economic standing.

Still, Schnabel acknowledged the risks posed by escalating trade tensions, particularly in the form of inflation volatility and financial market uncertainty. She warned that tariffs can be amplified through global value chains, posing upside risks to inflation. At the same time, the weaponisation of raw materials threatens to further strain supply chains.

The European Central Bank (ECB) is expressing concerns about potential economic slowdowns in the eurozone, but remains confident in its ability to manage the challenges ahead.

ECB President Christine Lagarde highlighted these risks during a hearing with the European Parliament's Committee on Economic and Monetary Affairs. Lagarde identified higher tariffs and a stronger euro as factors likely to hinder exports, while high levels of uncertainty are expected to delay investment decisions.

Despite these challenges, the ECB anticipates that a robust labour market, increasing real incomes, and strong private sector balance sheets will bolster economic resilience. Additionally, favourable financing conditions, along with investments in defence and infrastructure, are projected to support medium-term growth.

The euro made strong gains as the market accepted that the elevated risk of the past few days has marginally dissipated.

The common currency rallied to a high of 1.1633, a level it challenged three times in the day, but fell back to close at 1.1607.

Have a great day!