15 September 2025: The MPC has to make a tough call this week

This week will be something of a watershed for the UK monetary policy, since both the latest employment and inflation numbers will be fresh in the minds of MPC members as they deliberate about a cut in interest rates.

Although the unemployment rate is expected to remain unchanged at 4.7% average earnings are likely to have fallen from 5% in July to 4.8% in the three months to August.

However, when bonuses are included, wages may have risen from 4.6% to 4.7%. This is still above the headline inflation rate, which is expected to have remained unchanged at 3.7%, although the risk remains to the upside given warnings from farmers about the weather’s effect on their harvest.

The MPC contains several members, particularly on the independent side, who need to be convinced about the overall path of both employment and inflation.

The two main protagonists are Catherine Man and Swati Dhingra, who not only hold opposing views on the economy but also insist that rates need to remain unchanged for an extended period, or want them cut immediately. It would be fascinating to be a “fly on the wall” of the room where the debate takes place, but so far, the Bank of England hasn’t succumbed to the draw of reality TV.

Another issue to be debated this week is a proposal to slow the rate at which the Bank is selling its holdings of Government Bonds.

Andrew Bailey has been urged by former Bank of England policymakers to ease pressure on the government’s borrowing costs by cutting back its bond-selling plans.

In a crunch week for the economy, four influential ex-members of the Bank’s monetary policy committee said a change in course was needed.

Britain’s long-term borrowing costs have hit their highest level in 27 years, intensifying the pressure on Chancellor Rachel Reeves before her 26 November autumn budget.

Staffers at the Bank have blamed the rise on global factors, triggered by Donald Trump’s trade war and his assault on the independence of the US Federal Reserve.

However, the Bank admitted last month that a £100bn programme of bond sales to unwind its crisis-era quantitative easing scheme is also playing a role.

With the government under pressure on the economy, the Bank is widely expected to keep its base rate unchanged on Thursday at 4%, but could signal a slowdown in its bond-selling plans for the next 12 months.

Michael Saunders, a former MPC member now at the consultancy Oxford Economics, urged the Bank to scale back its disposals amid febrile market conditions. “It is highly likely they will slow the pace. The gilt market and bond market in general are weak and volatile,” he said. “Current conditions are such that a higher pace of active sales might have an undesirable effect on pushing up yields further.”

Last week, the pound gained primarily due to the continued volatility that surrounds the dollar and Trump’s economic policies. It rallied to a high of 1.3590 and closed at 1.3558.

The American economy is performing significantly better than comparable nations, showing broad-based strength and even indicating accelerating growth, which gives investors and consumers plenty of reason to feel more optimistic, despite the consensus estimates from earlier in the year.

The United States economy is outperforming those of the UK, Germany, France, Italy, Japan, and the entire euro area, with estimates of economic growth that exceed those of the best-performing developed nations, along with significantly lower unemployment rates and solid real wage growth.

However, as economists will agree, past performance is not a guarantee of future strength.

The effect of Trump’s programme of tariffs that have been inflicted on just about every nation that exports raw materials and finished goods to the U.S. is yet to be fully realised; even, according to Jerome Powell, their effect will be a one-off cost.

The unpredictability of the Trump Administration, which seems to make policy up as it goes along, according to what is popular among its right-wing supporters, means that the world may see more protectionist policies introduced during the President’s second term.

Throughout the first half of 2026, the Cabinet will begin to prepare for the mid-term elections that will take place next November. However, Trump will be unconcerned about them since he believes that anyone who voted for him in 2024 has got precisely what they expected from this Administration.

The FOMC will meet this week, and the result of their deliberations is likely to be a twenty-five basis point cut in the fed funds rate.

This will be the first cut of 2025, and should the September NFP report show that job creation has fallen into negative territory, it could be the first of three in quick succession.

While that would undoubtedly please the President, he will still criticise the delay over the course of this year, believing that the FOMC has been politically motivated, even as Powell and his colleagues have made strenuous denials of that idea.

To balance what he sees as political bias, Trump has promoted his own people as Fed Governors to balance the committee's views.

Political pressure will underscore this week’s Fed meeting, when policymakers will consider interest rate cuts to steer the economy through slowing growth and stubborn inflation.

Donald Trump’s aggressive steps to reshape the Federal Reserve could play out dramatically at this week’s Fed policy meeting, marking an extraordinary moment of political tension at an institution designed to operate independently of White House influence.

There is no specific definition of what constitutes stagflation in an economy. For most economists, rising inflation and falling growth or a slowdown in activity point to an economy on the path to stagflation, but just as no one can confirm when an economy has achieved a soft landing, stagnation feels almost like a myth.

Both conditions are rare, and the path to each is a journey rather than a destination.

The dollar index reacted last week to the likelihood that the Fed will cut rates this week. There were even rumours of a fifty-point cut, but the economy does not yet warrant such a move.

The index fell to a low of 97.25 but recovered to close at 97.61.

Most members of the ECB’s Governing Council believe that interest rates are now in mildly supportive territory, and that is why there was a vote for no change at last week’s meeting. Indeed, it is believed that there will be a move to consider the next shift to be a hike if inflation begins to rise in the coming quarters.

The ECB does not believe that there will be any significant change to inflation before the end of next year. That supposes that the global economy will grow close to the IMF’s prediction of 3% this year and 3.1% next.

It also believes that the balance of risks is roughly equal between inflation and growth, although there remains a hawkish view that inflation is never far away.

ECB President Christine Lagarde has confirmed her “fence sitters” credentials by telling reporters that she is neither a hawk nor a dove, but they can consider her an Owl. Although she didn’t explain this, it is taken to mean that she will study every aspect of the economy before deciding on how she will vote at upcoming meetings.

There is an ongoing belief concerning G7 rate-setting meetings, whether that is the MPC, FOMC or the ECB’s Governing Council, that decisions are driven by members’ predilections and not by consideration of the data. At the ECB, Isabel Schnabel is a confirmed hawk who often fits the narrative around her beliefs, while a similar is true for Catharine Mann at the MPC and two Trump appointees to the FOMC.

Last week, the European Central Bank decided to leave interest rates unchanged, despite ongoing challenges posed by Trump’s tariffs. The decision reflects the resilience of the eurozone economy in the face of global trade tensions.

The focus in Europe has shifted to the fiscal crisis in France and any possible role for the ECB in containing potential market turmoil that could erupt from the country's out-of-control deficit and political logjam.

ECB President Christine Lagarde said after the rate decision that monetary policy was “in a good place”. She gave no hint of future moves, saying the bank is “not on a predetermined path."The ECB is standing pat on interest rates even as the US Federal Reserve has held the door open for a possible cut at its September 17 meeting.

The 20 countries that use the euro currency showed 0.1 percent growth in the second quarter over the quarter before, not great but not sliding into outright recession either, despite the disruption from US President Donald Trump's new and higher tariffs.

The S&P Global survey of purchasing managers, a key indicator of economic activity, came in at 51 in August, with readings over 50 indicating expansion.

The Euro continues to disregard the storm clouds that have gathered over the French economy and continues to gather strength from the ECB’s commitment to keeping rates steady.

Last week, it climbed to a high of 1.1780 and closed at 1.1732, well in advance of its 1.1700 level of resistance.

Have a great day!