31 October 2025: There is a growing split within the MPC

The pound remains under pressure after reports that the Office for Budget Responsibility OBR has revised its productivity growth forecasts lower by 0.3%, potentially widening the fiscal gap by £20 billion. This revision, ahead of the Autumn Budget due on November 26, reinforces expectations of the Bank of England's monetary easing. Markets are currently pricing a 68% chance of a 25-basis-point rate cut in December, while some analysts, including Goldman Sachs, see the first cut as early as next week.

The markets are as split about the future path of interest rates as the members of the MPC clearly are. Next week’s meeting could again see the Bank’s Governor being faced with the prospect of casting the deciding vote.

Andrew Bailey is likely to retain his hawkish stance, although G7 Central Bankers, with the obvious exception of Christine Lagarde, have pivoted to address a global economic slowdown. Bailey likes to think of himself as cast from the same mould as Jerome Powell. Since Powell can ignore the fact that inflation is higher than it should be, there is no reason that Bailey can’t too.

Traders and investors are like Chess players in that they like to consider two or three moves ahead. They have already made plans based on their view of next week's meeting, which is the first quarter of 2026, and are currently exercising their minds.

While inflation is falling, all but the most dovish of the MPC members should be satisfied with the current levels of growth. They have been “assured” by the Chancellor that the country will not see a recession early next year; in fact, she has staked her reputation on it!.

However, the changes to the fiscal landscape in next month's budget may alter the growth outlook, although it is probable that Reeves has already dreamt up an excuse to deflect blame away from her.

A simple error she has made, which has been easily corrected, has forced the Prime Minister to provide his Chancellor with his unyielding support again. For a man so versed in the ways of the courtroom, Starmer appears to “back the wrong horse” a little too often. In fact, his support can frequently be the final blow; just ask his former deputy.

The number of UK firms in "critical" financial distress has surged 78% compared to the same period a year earlier, according to a report published yesterday by a prominent business advisory and insolvency specialist.

The report, known as the Red Flag Alert, also showed a 12.6% increase in distressed businesses over the previous quarter. The report provides a quarterly review of the underlying UK economy over 25 years.

These are the type of messages that the Chancellor should be heeding as she prepares what is likely to be another attack on the very fabric of growth.

The pressure on the pound saw it fall to a low of 1.3116 yesterday, though late buying saw it rally to close at 1.3151.

Federal Reserve Chair Jerome Powell surprised many market-watchers on Wednesday when he declared that another interest rate cut in December was not a slam dunk. Perhaps even more surprising was his apparent suggestion that if boosting the labour market is the goal, rate cuts might not be that useful.

A hawkish rate cut is not only difficult to achieve but also convinces observers that, even though he disagreed with the vote, he went along with it.

In the press conference after the Federal Reserve lowered the fed funds rate by 25 basis points, Powell cited several reasons why a similar move in December is "far from" a done deal. These included "strongly different" views among rate-setters, limited data visibility due to the government shutdown, above-target inflation, and doubts about how quickly the labour market is slowing. He also noted that policy may be close to neutral after 150 basis points of easing.

It is easy to quote the pace of job losses when there is no official data to dispute your claim.

A formidable group of Trump followers who have found their way into the FOMC despite the Regional Fed Presidents’ best efforts to maintain a majority will cause Powell to bite his tongue as he enters the final six months of his tenure.

Trump’s gamble of appointing a non-banker to the position of the Head of the most important Central Bank in the world has backfired to a certain extent, especially so far during his second term, but that is not to say that it will not be repeated. The names mentioned by the Treasury Secretary earlier this week have one thing in common: support for the current administration.

Trump continues to avoid discussion of the current domestic crisis by simply refusing to be available. However, it is a reasonable excuse to travel to meet the leader of the second-most-powerful nation in the world.

Trump was positively buoyant following his meeting with China’s President Xi. He labelled the meeting a 12/10 as the two leaders agreed on a period of détente over their country’s trading relationship.

Remembering that he has a country to run, President Trump has urged congressional Republicans to unilaterally end the government shutdown by eliminating the Senate filibuster, a move GOP leaders have firmly opposed until now.

“It is now time for the Republicans to play their ‘TRUMP CARD,’ and go for what is called the Nuclear Option. Get rid of the Filibuster, and get rid of it, NOW!” Trump wrote in a Truth Social post.

The dollar index continues to shy away from a bid to breach the 100 resistance level. The volume of pressure mounting may see the index explode through that level and carry on to the 102.20 level, but there is precious little data to confirm such a move in the absence of more news on job creation.

It reached a high of 99.72, but drifted back to close at 99.54.

Yesterday’s ECB meeting was the epitome of a damp squib, with nothing on the fiscal front that had not been said a million times before. Despite inflation near the 2% target, uncertainty persists due to ‘global trade disputes and geopolitical tensions’ according to ECB president Christine Lagarde.

“The robust labour market, solid private sector balance sheets and the Governing Council’s past interest rate cuts remain important sources of resilience,” the ECB said in a statement. “However, the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.” This final sentence is little more than a ploy to retain the markets' interest in what has been an utterly disappointing rate-cutting cycle.

Officials have been vocal of late in signalling that there’s little reason to add to the eight reductions in borrowing costs they’ve made to date. Their confidence stems from inflation that’s been hovering around the 2% goal for months and indications that the economic damage from Donald Trump’s trade measures has been relatively contained.

Unsurprisingly, the decision did little to move markets. The euro held onto earlier losses, trading down 0.4% at 1.1554, while two-year German yields remained three basis points higher at about 2%. Swap markets continue to suggest the ECB’s campaign of cuts is likely over, but that has been a forgone conclusion for some time.

As long as Germany, France, Italy and Spain continue to be “satisfied” with the overall level of growth, the rest will follow on like sheep, no matter the effect on their own economies.

Lagarde broached a wider subject in her speech. “Is Italy’s rating undervalued compared to other countries such as France? I don’t want to judge individual countries, let alone make comparisons between different countries, but I was impressed by the country’s economic development and public finance management.’ Italy’s failure to ratify the ESM is a problem, I think,’ Lagarde added.

The European Stability Mechanism (ESM) is an intergovernmental organisation based in Luxembourg City that operates under public international law for all eurozone member states that have ratified the ESM intergovernmental treaty. It was established on 27 September 2012 as a permanent firewall for the eurozone to safeguard and provide instant access to financial assistance programmes for member states in financial difficulty, with a maximum lending capacity of €500 billion.

Bank's first issuance should then occur in 2029.

The Euro is acting precisely as the ECB hopes. It is weakening, albeit slowly, as rates remain unchanged. It fell to a low of 1.1547 and closed at 1.1564.

Have a great day!