10 October 2025: Bailey says UK innovation needs a ‘supportive’ investment environment

Rachel Reeves will have to take note of the views of backbench Labour MPs as she prepares her Budget for delivery to Parliament next month.

She would be unlikely to survive a repeat of the backlash that followed her canes to welfare, which were a significant part of her Spring spending review. The backlash prompted the Prime Minister to intervene, which, in turn, led to one of several U-turns over the last fifteen months.

The withdrawal of the two-child limit for welfare payments would allow Reeves to introduce measures that would be less popular with backbenchers. However, should she leave the highly unpopular and controversial measure in place, she would face a revolt that could easily cost her her job.

She will need to factor in the additional cost of removing the cap, which is estimated at close to £4 billion a year.

Bridget Phillipson is pushing the Prime Minister and Chancellor to scrap the two-child benefit cap entirely in next month’s budget, with the Education Secretary telling reporters the evidence is clear that it needs to be removed.

Phillipson, who is finalising a report for Keir Starmer and Rachel Reeves on child poverty, said abolishing the cap was the most cost-effective way to improve the lives of young, disadvantaged people.

Philipson’s intervention comes after it was revealed that Reeves is exploring a “tapered” system that would remove the cap in part, but not entirely, for example, by moving the cap to three or four children instead.

Officials say, however, the Chancellor will find it challenging to go against the findings of the child poverty taskforce, which Phillipson co-chairs, meaning Reeves is now under more pressure than ever to find the money to abolish the cap.

Reeves will have been dismayed to have her thunder stolen by Kemi Badenoch this week, when the Tory leader announced that, were her Party to win the next General Election, she would abolish stamp duty on primary residences.

It may come down to a straight choice for Reeves: either remove the benefit cap or stamp duty.

Bank of England Governor Andrew Bailey tries to stay above the day-to-day chatter about interest rates. However, it is expected that the speech by the Bank’s Chief Economist, Huw Pill, this week would have had Bailey’s explicit approval.

Instead, the Governor spoke earlier this week about the danger of putting total faith in artificial intelligence, in case it turns out not to be the singular benefit it is expected to be. The effect on markets could be catastrophic if companies turn away from any form of innovation, particularly something as potentially game-changing as AI.

Bailey also said that such innovations need to be backed by levels of investment that have not yet been reached in the UK. He went on to say that he supported using regulation to force pension funds to invest more in UK companies.

The pound has suffered a difficult week, despite investor concern that the U.S. economy will begin to suffer if the Federal shutdown continues much longer. Sterling fell to a low of 1.3279 yesterday and closed at 1.3303

There is not much support for anything that would spike Donald Trump’s guns right now, but the markets are still concerned about the threat to Central Bank Independence.

There is one rumour currently doing the rounds that takes the form of a question: Why do Fed Governors vote at FOMC meetings on changes to monetary policy?

Each governor has a particular responsibility for specific areas of the Fed’s supervisory role. For example, Michael Barr is Vice Chair for Supervision, Michelle Bowman also has the same title, while Christopher Waller oversees the Federal Reserve system. Other Governors are Jefferson, Kugler, recently appointed Stephen Miran and the under pressure Lisa Cook.

The committee is completed by its Chairman, Jerome Powell, and the Presidents of the Regional Federal Reserves, who serve on a rotational basis.

Given the Regional Feds' proximity to what is actually happening in the economy, it is felt that all nine regional Fed Presidents, plus the New York Fed’s John Williams, who is a permanent member, should replace the Fed Governors.

The Governors have their own roles to fulfil, and their replacement would mean that the committee has less theoretical knowledge, but more practical experience.

The head of America’s largest bank has warned the globe that the risk of a sharp downturn in US stocks is higher than many investors currently believe.

The chief executive of J.P. Morgan, Jamie Dimon, told the BBC he is “far more worried than others” about the possibility of a significant market correction within the next six months to two years.

The word of the decade is “disruption”, and the AI boom is creating a very uneasy atmosphere among anyone who isn’t a large company owner. Predictions vary on exactly when mass automation will fully take hold, with governments facing increasing pressure to get ahead of the curve before the real crisis hits.

Dimon’s warnings branched further than just AI, however. He also claims the United States has become a “less reliable” player on the world stage amid rampant inflation and strained alliances between Western powers.

Were he not to be such a powerful force around Wall Street, Dimon would be dismissed as another “wolf crier”, especially as he has been saying that the economy has been headed for a recession for almost two years.

The dollar index has shrugged off concerns about a shutdown-induced economic slowdown, as the Fed continues to dismiss wholesale or preemptive rate cuts. It rallied to a high of 99.56 and closed at 99.40.

The index held firm near a nine-week high yesterday, and remains on track for the best weekly performance in months.

A substantial fall of Japanese yen amid political turmoil in Japan and deepening political crisis in the US and France, as well as less dovish than expected minutes of the Fed’s latest policy meeting, were the key drivers of the greenback in the past couple of days, after the dollar opened with a gap-higher on Monday.

It may run into some technical resistance on the approach to the 100 level. Still, as long as any correction is relatively shallow, that level should be conquered at its second or possibly third attempt.

There are always all manner of rumours constantly floating around in the market. One of the more solidly backed ones is that the Euro could be on the cusp of a significant reversal or correction.

Traders have been primarily driven this year, certainly since April, by factors outside the ECB's control. The uncertainty caused by the introduction of tariffs on almost all U.S. imports of raw materials and finished goods saw the dollar fall considerably, with the single currency the primary beneficiary.

The rise in the euro drove inflation lower and allowed the Central Bank to cut interest rates to 2%, when such a round of cuts would have seen the currency weaken, promoting higher inflation. Members of the ECB’s Governing Council must have thought all their Christmases had come at once as the currency continued to defy gravity.

However, “chickens may be about to come home to roost”: the U.S. is posting growth levels three times what is being achieved in the Eurozone; France is on the brink of a catastrophic event; while Germany will only post mediocre growth next year after three years of decline.

The only positive stories in the region are coming from Spain and some smaller economies like Greece and Cyprus.

France is the EU's second-largest economy, and concerns are growing that a prolonged deadlock could negatively impact the eurozone's economy.

France's political and economic woes are not yet ringing alarm bells across the EU. Still, concerns are rising that a prolonged crisis could impact the eurozone's growth prospects and negotiations for the bloc's €2 trillion long-term budget.

The French Government of Prime Minister Sébastien Lecornu has been in caretaker mode since Monday morning, after it spectacularly collapsed less than 24 hours after its ministers were announced.

At the heart of the crisis are disagreements in the hung parliament over how to bring the country's strained finances into order.

In the political deadlock, Macron burned through his fifth prime minister since the start of his second mandate in May 2022. This is already impacting the country's economy, with the latest events pushing stocks down and bond yields up.

New elections appear to be inevitable, but it will take something spectacular if they do not produce another hung Parliament and more confusion.

It is becoming obvious that President Macron needs to relinquish the power that he is clinging to, like “flotsam in a storm”.

The German economy is expected to maintain its growth momentum thanks to a series of measures introduced by the Federal Government, but the U.S. tariff policy is significantly hindering its recovery. This statement from Federal Minister for Economic Affairs and Energy Katherina Reiche appears to portray an extremely confident attitude that is not being felt elsewhere.

Germany is hanging all its hopes on the injection of investment in the defence and construction sectors that have been announced by the Chancellor recently.

The Federal Ministry for Economic Affairs and Energy of Germany stated in a report released on Wednesday that the country's economy is projected to grow by 0.2 percent this year, 1.3 percent next year, and 1.4 percent in 2027, driven by the special investments by the federal government and increased defence spending.

The Euro has begun what could be a “winter of discontent” as it fell to another low yesterday. It reached a low of 1.1542 and closed at 1.1564, which, apart from a single day in early August, was its lowest since mid-June.

There may be more to come, especially if the U.S. shutdown is resolved in the coming weeks as Trump “rides the wave” of the Gaza peace deal.

Have a great day!