22 September 2025: Reeves is looking at breaking her VAT undertaking

The slow and painful slide of the UK as a global economic power since its heyday between the end of World War II and the late 1960s is based, as discussed last week, on many irreversible factors, but last week’s announcement of significant investment in the UK from three titans from the tech sector may see the country rise again.

With Nvidia, Google and Microsoft committing to building several AI factories in the country, it is possible, indeed likely, that the country will find itself at the forefront of a second industrial revolution.

This will not happen overnight. The CEO of Microsoft said last week that it could take ten years for the economy to see the full benefit, although Satya Nadella believes that the boost to employment and growth could start to be seen in around five years.

It is curious that so far, Sir Keir Starmer has not been “shouting from the rooftops” about this development. However, he has had more pressing issues to deal with, including the recognition of the Palestinian State, which he sees as a prelude to a two-state solution.

Rachel Reeves has been “beavering away” working on her November Budget. Her popularity has fallen to such an extent that she may as well have been writing her letter to Santa.

Rumours are circulating throughout Westminster that she intends to break her promise to leave income tax, National Insurance for employees and VAT untouched, by increasing the sales tax (VAT). This was a somewhat unusual pledge to have made, since VAT is a tax that is optional, in that if you don’t buy goods, you don’t have to pay it. However, an increase will harm consumer spending and retail sales, both of which are vital to maintaining growth.

Reeves has apparently sent her Treasury out into the community to gauge the market's reaction to the imposition of VAT on taxi fares, a relatively insignificant area of the economy but possibly a bellwether for other sectors.

The Bank of England provided no help to the Chancellor by leaving the base rate of interest unchanged following last week’s meeting of its Monetary Policy Committee. The MPC has become somewhat predictable, as it is split into three: the permanent members, who are supposedly data-driven, the hawks, and the doves. The latter two are made up of independent members. Who vote according to their beliefs about inflation as an enemy of the economy.

The Bank’s Chief Economist is due to make a speech later today, in which he may provide some insight into the Bank’s view of both the economy and monetary policy for the rest of the year.

The pound rallied briefly to a high of 1.3726 last week as the Fed Chairman provided a dovish view on U.S. monetary policy in the wake of an interest rate cut. However, it quickly fell back to close at 1.3470.

The Federal Reserve has recently become unpopular among citizens of the United States, who have previously taken little interest in the workings of the Central Bank. Suddenly, anyone who is struggling to pay their home loan or falling behind on credit card debt knows the name of Jerome Powell and believes that he is singularly responsible for their problem.

Apparently, Powell is also responsible for the difficulties being felt by anyone who is looking for another job or has recently lost their current one.

This is, naturally, due to the scope of the President’s influence and is wholly unfounded. It is true that in the early days of Powell’s Chairmanship, workers could easily switch jobs, almost on a whim, since jobs were plentiful and salaries were rising steadily. However, all good things come to an end, and all economies move cyclically. Good times are followed by bad, and vice versa. The U.S. economy that is studied in infinite detail is always on the verge of a boom or a recession.

The current view is that, even though inflation remains “sticky”, the Fed has plenty of ammunition left to provide support to job creation, if needed.

Any analyst or economist worth his salt will tell you that the Fed has a dual mandate. This is to maintain price stability and maximum employment.

The truth is that it has a third, not often mentioned, mandate.

This was pointed out by Trump’s appointee to the FOMC, Stephen Miran, during his confirmation with the Senate Banking Committee last week. Miran recalled the Federal Reserve Act of the 1970s, which stated that “Congress wisely tasked the Fed with pursuing price stability, maximum employment, and moderate long-term interest rates.”

Economists and Wall Street analysts had mixed reactions to the mention of the Fed’s often-unmentioned third task. Indeed, the very definition of moderate long-term rates is open to interpretation. Does it refer to 10-year Treasury yields, perhaps 30-year bonds? Or, is it a proxy for financial stability more widely?

If something can’t be measured, those who favour the sciences over the arts, and economics is an art, tend to ignore it.

In a time of increased focus on the Fed and its credibility, critics of the central bank may argue that by omitting mention of moderate long-term rates, the Fed is letting itself off the hook. Jerome Powell would doubtless argue cause and effect, since price stability and maximum employment are causes which affect interest rates.

This week, several Regional Fed Presidents will emerge from the news blackout that takes place around an FOMC meeting to provide their take on events. Later today, Musalem, Williams, Hammock, Barkin and the aforementioned Miran will be making speeches, no doubt closely followed by others who may or may not have a vote this year. Tomorrow evening, Jerome Powell will make a speech, although he is unlikely to contradict anything he said last Wednesday.

The dollar index saw increased volatility last week as Powell intimated that the rate cut agreed by the FOMC may be the prelude to further cuts later in the year, and then pushed back against Trump’s interference by saying that decisions are based on the data and pay no heed to politics.

The Index initially fell to a low of 96.22, but quickly rebounded to 97.81 before closing at 97.66.

Bernard Arnault, the boss of luxury goods group LVMH and France's richest man, has attacked a proposed 2 per cent tax on billionaires as an assault on France's economy and denounced the plan's architect as a far-left ideologue.

The tax, which would target wealth above 100 million euros, has gained political traction in France, where Prime Minister Sébastien Lecornu faces pressure from the Socialist Party to include it in the 2026 budget or face a confidence vote that could topple his government.

"This is clearly not a technical or economic debate, but rather a clearly stated desire to destroy the French economy," Arnault told The Sunday Times.

He accused the plan's architect, economist Gabriel Zucman, of being "first and foremost a far-left activist" who uses "pseudo-academic competence" to promote an ideology aimed at dismantling the liberal economic system, which Arnault described as "the only one that works for the good of all."

Zucman, a professor at France's École Normale Supérieure and the University of California, Berkeley, rejected the accusations.

"I've never been an activist for any movement or party," he said on social media, adding his work was grounded in research, not ideology.

The French budget crisis and social unrest have attracted the attention of the ratings agencies, with Fitch downgrading French government debt on Friday. Despite this, the ECB still believes that Bond markets have not become irrational and have so far not been inclined to intervene, although that may change if the French Parliament looks like holding yet another confidence vote.

The Assemblée nationale (lower house) is hopelessly divided between Jean-Luc Mélenchon’s left-wing La France Insoumise and Marine Le Pen’s National Rally.

In many countries, a General Election is the only answer. Still, the country is as hopelessly divided as parliament, with the only thing they currently agree on is that they do not want to celebrate fewer national holidays.

European Central Bank (ECB) Governing Council member Martins Kazaks said last week that inflation hovering slightly below 2% is acceptable, stressing that the Central Bank should avoid knee-jerk policy moves. The Latvian Central Bank Governor argued it would be unrealistic to expect inflation to always land exactly on target, and rates should only shift if there’s a clear need.

Kazaks said the ECB has already achieved its goal with inflation near 2%, so there’s no reason to rush into more cuts after the eight already delivered. While October is unlikely for a move, he noted December could bring more clarity as fresh economic projections arrive.

He added that, if warranted, a small rate cut could be used to reinforce the ECB’s baseline scenario, similar to the final hike in 2023.

He also flagged risks such as a stronger euro, cheaper imports from China, and the new emissions trading system, which could all sway inflation. Overall, he expects price growth to fluctuate around 2% and says minor deviations should not prompt policy shifts.

Last week, the euro rallied to its highest level for almost five years in the wake of the FOMC meeting. However, it ran into intense selling pressure around the high of 1.1988 and quickly fell back to a low of 1.1716 before closing at 1.1745.

Have a great day!