16 July 2025: Reeves is wooing the City but forgetting the country

The Chancellor of the Exchequer is “making all the right noises” to woo City executives and investors by introducing plans to make the UK the “Fintech Capital of the world”. While investment flows must continue to pour into the country, Rachel Reeves may be trying to run before she can walk.

The “bread and butter” of the job is to balance the nation's day-to-day spending against the income that is generated by taxation and encourage longer-term investment to fund capital projects in infrastructure.

The country’s finances lack stability, while public borrowing has skyrocketed over the past year.

Against a less-than-robust backdrop, Reeves has laid out the government’s plans to make the UK the world leader in fintech in the Chancellor’s latest effort to attract a significant number of listings from the industry.

Reeves has unveiled the Treasury’s Financial Services Growth and Competitiveness Strategy, in which she has laid out her vision to make the UK the “world’s most technologically advanced global financial centre, remaining a leading jurisdiction for fintech firms to start up, scale and list”. What she fails to realise is that these strategy documents are little more than “door stops” for Whitehall offices.

The new unit, led by the Financial Conduct Authority and Prudential Regulation Authority, will build on the regulator’s existing joint ventures, including the new bank and insurer start-up units.

While on the one hand, Reeves discusses reducing the size of government departments to save costs and drive efficiency, on the other, she feels that her own department is exempt, when it should be the most dynamic team solving day-to-day issues and leaving innovation to others.

Bank of England policymaker Catherine Mann said yesterday that inflation pressures remained a challenge, despite a slowdown in the pace of pay growth in recent months, and that it was essential to use interest rates to curb price growth.

"We have seen wage rates come down, so people are getting wage increases, but not at the rate in the past," Mann said in an interview with Business in Wales.

We’ve seen price inflation come down quite a bit, but it’s still a challenge because it's still well above our 2% objective.

Mann stressed the importance of using interest rates to bring inflation back to target.

"It’s important for us to continue to use monetary policy in order to get us to that 2% inflation objective because inflation is a tax on everybody," Mann said.

Mann, an external member of the BoE's Monetary Policy Committee, voted to keep borrowing costs steady at the MPC's last two meetings, including one when a majority of her colleagues backed a cut.

Financial markets are betting on the MPC cutting rates by twenty-five basis points to 4% when it announces its next move on August 7, and see rates most likely falling to 3.75% by the end of 2025.

The pound closed the day yesterday right on its short-term level of support. It closed at 1.3386, having previously fallen to 1.3379.

Should it continue to weaken, it will open up a path to its medium-term support of 1.3150.

Recent comments from a plethora of Regional Federal Reserve Presidents and Governors have, by and large, been supportive of the Fed’s Chairman, Jerome Powell.

The round of comments began with Trump-appointed Governor Michael Barr discussing the lessening of red tape introduced during the Pandemic and the Biden Administration.

Proponents see this as a welcome adjustment; critics see it as a dangerous step in the wrong direction.

Barr draws from history to argue that boom times often bring a weakening of rules governing banks and other financial institutions that is followed by an economic bust with harmful consequences for households and businesses.

Barr recently dissented from the Fed board’s decision to relax the enhanced supplemental leverage ratio because, he said, it “unnecessarily and significantly reduces bank-level capital.”

Meanwhile, on the subject of inflation and interest rates, Richmond Fed President Thomas Barkin told reporters he sees more price pressures coming from the imposition of tariffs, as it was reported that CPI inflation rose to 2.7% from 2.4% in June.

He went on to say that it is not always the case that the FOMC agrees with its Chairman, since it is a democratic committee.

Federal Reserve Bank of Boston President Susan Collins said she's leaning toward the central bank cutting rates later this year amid an uncertain outlook.

"While I continue to expect it will be appropriate to resume gradual policy normalisation later this year, my outlook could change significantly as events unfold, and the economic impact of changes in various government policies comes into sharper focus," Collins said in a statement released by her bank. "Much will depend on whether the 'price shock' from tariffs dissipates quickly," she said.

At the recent FOMC meeting, the Fed pencilled in two rate cuts later this year, but it's unclear when those might be delivered, even as some Fed governors have signalled openness to act at this month’s meeting.

In her statement, Collins said, "I see monetary policy as currently well-positioned" in an economy that's in a solid position to be in.

It appears that Fed Governors are beginning to believe that rates could be lowered. Governor Michelle Bowman says Donald Trump’s tariffs will have a smaller effect on inflation than feared, despite last month's rise in the headline rate.

It will never be confirmed, but Trump may be pressuring Fed Governors, many of whom he appointed to their positions, since he cannot influence Powell or the Regional Presidents.

The dollar index continues to climb away from its year's low. Yesterday it reached 98.70, closing at 98.64. There is some congestion around the 98.90 level, but if that is cleared, a target of 99.40 will emerge.

Euroclear CEO Valerie Urbain believes that the European Commission's plan to invest frozen Russian assets in riskier instruments to increase profits for Ukraine is "expropriation." She warns of significant risks and potential losses that could arise from such actions.

The European Commission is considering how to get more benefit from the assets of the Russian Central Bank. Currently, this involves an amount of about 191 billion euros, which are "under the care" of the Euroclear clearing centre, due to previously imposed Western sanctions against Russia's aggressive policy.

Euroclear reinvests funds received from the redemption of Russian assets, such as coupon payments and redemptions, primarily through central banks. The G7 uses the profits to support a $50 billion loan to Kyiv.

She believes that systemic risk will certainly increase sharply “if we have to go beyond the risk profile we have and which is approved by our supervisors”.

If a "special purpose vehicle" is to be created to which Russian central bank assets will be transferred, and these funds will be invested in riskier investments, then the corresponding scheme will create "many risks for Euroclear and for European markets in the world."

She warned that the scheme could be viable if "in the event of any restitution claim from the Russian central bank, the assets disappear, and someone covers that amount."

European Central Bank President Christine Lagarde stated earlier in the week that the current interest rate path is in a "good position" and that the Bank remains committed to its medium-term inflation target of 2%

Germany is aiming to generate 10 per cent of its economic output from artificial intelligence by 2030, as part of an ambitious national strategy to secure its position in the global AI race, according to Reuters. The initiative is designed to strengthen Europe’s largest economy and position Germany alongside AI frontrunners like China, the United States and India.

The strategy, expected to be approved by the German cabinet later this month, outlines plans to turn AI into a foundational tool across key research areas and industrial sectors.

Though the current contribution of AI to the German economy is unspecified, the proposed measures include building high-performance processing centres within the European Union by 2027, with at least one to be located in Germany. Telecom giant Deutsche Telekom is reportedly among the interested companies.

As we begin the “European summer” where there is a traditional lull in market activity, the euro is drifting towards a more “acceptable level”.

Yesterday, it continued its recent run of lower closes, falling to a low of 1.1592 and closing at 1.1601.

Have a great day!