7 October 2025: Reeves believes the IMF bailout rumours are nonsense

Rachel Reeves' budget “nightmare” looks set to continue long after she announces her latest proposals to Parliament next month. It is hard to imagine that she will be able to promote the levels of growth she has promised while staying within her self-inflicted boundaries. Something has to give.

She has plenty of scope to raise taxes that will not harm workers, but she may not wish to upset the banks that she relies on to fund growth. An additional tax on bank profits will be unpopular in the City, while removing the payment of interest on their deposits placed with the Bank of England, part of the so-called “Farage plan”, could make sense if only to “spike the guns” of Reform UK.

There is a lot of water to pass under the bridge before the Budget, but economists believe that nothing will materially change before then. The next meeting of the Bank of England’s Monetary Policy Committee takes place on 6th November. Although the two main protagonists, Swati Dhingra and Catherine Mann, will provide the markets with plenty of reasons why their opposing views on inflation and growth should be considered, the main body of the committee will continue to act conservatively.

The September surveys of business activity were weaker than expected last week, with the composite index slumping to barely above the key level of 50 that separates growth from contraction.

The data suggests that the British economy is now growing at a sluggish sub-1 % rate, even as inflation remains stuck at around 4%. This is a light form of stagflation: a low-growth, high-inflation (but also low-unemployment) economy.

The job of balancing the books was made all the more challenging on Friday following OBR’s downgrade of the UK’s productivity forecasts, which has reportedly helped open up a £30bn gap in the public finances.

For now, the pound remains relatively stable, but this could change if markets fear perpetual tax hikes ahead.

British authorities should adopt a "pragmatic and open-minded approach" to the applications of artificial intelligence and seek to mitigate the risks it poses, rather than merely highlighting them, Bank of England Governor Andrew Bailey said yesterday.

"We must understand what it can and cannot deliver, and where it can create broader issues that will need to be tackled. But I would say to the alarmists that it is all of our responsibility to solve such issues rather than just broadcast them," he said.

Bailey made the remarks in the text of a speech released by the central bank ahead of its delivery at a dinner in Edinburgh, aimed at promoting investment in Scotland.

He stated that there was a need for a supportive domestic environment to facilitate investment in AI and other projects that require time to yield returns. He expressed his support for government efforts to encourage pension funds to invest more in British businesses.

The transition to renewable energy must aspire to the “pace of progress” set during the first North Sea oil boom, according to the Governor.

The backlash continues to grow over Sir Keir Starmer's plans to roll out digital IDs across the UK, with recent polling from More in Common indicating that 45 percent oppose the Government's scheme.

This is up from just 19 percent in June, when 53 percent previously favoured it.

Support for the scheme has dropped to less than a third, with only 31 percent backing the Government's plans. Over 2.8million people have now signed the petition to scrap digital IDs, with plans for the ID system to be introduced by 2029.

This is no more than an interesting distraction from the fundamental question of how to stop the boats. The New Home Secretary has continued where her predecessor left off by “talking a good game” but proposing little permanent change.

The pound began the week on a solid footing, but the markets are currently in the doldrums, having squeezed out just about every ounce of volatility from the current drivers. Sterling reached a high of 1.3490 and closed at 1.3485.

“JUST OUT: Good news for the Holiday Season. EARLY PRICES ARE DOWN, WHILE TARIFFS ARE MAKING OUR COUNTRY AN ECONOMIC POWER AGAIN. Also, virtually NO INFLATION, AS STOCK MARKETS CONTINUALLY HIT RECORD HIGHS. THE BEST OF ALL WORLDS FOR THE U.S.A.”

This was the offering from President Trump on social media yesterday as he continues to ignore the millions of employees of the Federal Government who have been temporarily laid off as the shutdown continues, and whose fate could be sealed by a swipe of Trump’s felt-tip pen.

The Dow Jones Index indeed continues to set record highs, but this is more a testament to the fact that financial markets are currently more concerned with monetary policy than fiscal policy.

However, the fear is that both sides in the dispute will become increasingly entrenched if the shutdown continues, and that would force markets to take notice.

So far, an air of “we’ve seen it all before” pervades investors' minds, but that could change if it becomes clear that a settlement could take some time, with neither side wanting to back down.

The Kansas City Fed President Jeffrey Schmid said recently that the Fed is currently close to meeting its mandates, but added that policy must be forward-looking. The Chairman of the Fed, Jerome Powell, insists that he is indeed forward-looking, but the results of the Central Bank’s policy meetings have been reactive.

A fear that the economy may not react as its models suggest is uppermost in the minds of FOMC members when it comes to voting on changes to the Fed Funds target.

Donald Trump’s appointee to the Federal Reserve’s Board of Governors said Monday that the central bank’s key interest rate should be much lower than its current 4.1% level, staking out a position far different from his colleagues.

Stephen Miran, who is also a top economic adviser to Trump, said in remarks to the Economic Club of New York that sharp declines in immigration, rising tariff revenue, and an ageing population all suggest that the Fed’s rate should be closer to 2.5% instead. According to projections released last week, that’s almost a whole percentage point lower than any of his 18 colleagues on the Fed’s rate-setting committee, an unusually high divergence.

Miran’s comments underline the different perspective he brings to the Fed’s deliberations over interest rate policy. His appointment has been controversial because he has kept his position as the head of the White House’s Council of Economic Advisers while taking unpaid leave, raising concerns about the Fed’s traditional independence from day-to-day politics.

Trump seems to have abandoned any pretence he may have had of covertly influencing the FOMC’s decision-making process, ignoring protestations that central banks globally operate more efficiently when free of Government influence.

The market has been almost exclusively driven by Trump since his return to the White House, with only brief interludes when the Fed may be considering changes to monetary policy. However, these have been telegraphed well in advance.

The dollar index spiked higher on rumours that a solution had been found to the shutdown, but quickly fell when they came to nothing. This showed that, if nothing else, traders are becoming more concerned about its expected length.

The index eventually closed at 98.10, marginally above its opening level.

There were a plethora of speakers from the ECB Governing Council. They all “sang from the same song sheet” with only slight variances depending on their hawkish or dovish tendencies.

ECB Chief Economist and the darling of those who see him as being the closest to Mario Draghi of the likely candidates to replace Christine Lagarde as President of the Central Bank, said that he only expects the rate to be cut when there is a clear indication that the region’s economy is suffering, and unlikely to recover without support.

Policymakers follow a data-dependent approach in every policy session, and any increase in the degree of downside risks could warrant a modest reduction in interest rates.

"In addition to the evolution of the baseline inflation outlook, shifts in the risk distribution will also matter for our rate decisions: an increase in the likelihood or intensity of downside risk factors would strengthen the case that a slightly-lower policy rate might better protect the medium-term inflation target," Lane said in a speech at an ECB conference in Frankfurt.

It was refreshing that a member of the Bank’s Executive Board could make a speech without mentioning the “I” word.

The next cab off the rank was ECB Vice President Luis de Guindos, who said that risks to the inflation outlook are currently balanced. He noted that the ECB's projections are coming true and that the central bank's rates are therefore appropriate.

De Guindos said that the services' inflation, "which was an indicator that concerned us," has moderated considerably, but that consumption has grown less than expected. However, he warned that the level of global uncertainty is still "very high."

One does not have to delve too deep to find someone at the ECB who has inflation concerns.

Retail trade in the Eurozone increased by 0.1% in August, while it remained stable in the European Union, Eurostat revealed in its report yesterday. On an annual basis, retail sales advanced by 1% in the Eurozone and by 1.1% in the broader bloc.

Retail sales volumes for food, drinks, and tobacco increased by 0.3% in the euro area and by 0.2% in the EU on a monthly basis. Meanwhile, sales of non-food products slipped by 0.1% in both the Eurozone and the bloc. Retail sales of automotive fuel in specialised stores increased by 0.4% in the euro area and 0.3% in the EU.

Countries that recorded the most significant month-on-month increases were Lithuania, with a 1.7% rise, followed by Cyprus and Malta, both with a 1.5% gain, and Sweden, which advanced by 1.1%. On the other hand, retail sales in Romania fell by 4%.

The Euro continues to drift, constrained by monetary policy and the impact of tariffs on the economy. It reached a high of 1.1731 before closing marginally lower at 1.1711.

Have a great day!