18 November 2025: Government bonds recover after their recent selloff

The latest figures for inflation will be published tomorrow, with economists expecting the headline rate to have fallen marginally, in line with the Bank of England’s prediction that it has peaked at 4% and is now on a downward trajectory.

The headline rate is expected to have fallen from 3.8% in September to 3.6% last month, while the core rate with volatile items stripped out is predicted to have fallen to 3.4% from 3.5%.

Speaking yesterday, the MPC’s most ardent hawk, Catherine Mann, said there’s still “work to do” to get inflation back to the BOE’s 2% target. She pointed to evidence that firms are paying attention to inflation when setting their one-year-ahead pricing strategies.

“For me as a decision maker, that means the underlying dynamic for inflation continues to show upside risk,” Mann said in her remarks at a King’s College London event. “In a high inflation environment, there’s this asymmetry. Firms are far more likely to raise prices than to reduce them.”

Mann has argued for keeping interest rates restrictive to prevent inflation from rising above the target. Her worries over inflation expectations stand in contrast to some colleagues, including Governor Andrew Bailey, who are becoming more focused on weak growth and a rapidly deteriorating jobs market.

The opposite view will be delivered later this morning, when the committee’s most longstanding dove, Swati Dhingra, will likely set out the reasons she will vote for a cut next month.

After a close vote to hold interest rates at 4% in November, BOE policymakers will be poring over the latest data as they decide whether to cut at their next meeting in December. Traders are pricing in around an 80% chance of a move next month.

The prices of Government bonds recovered yesterday as the market accepted the premise that there will be no increase in income tax in next week’s budget. Prices had initially rallied following Rachel Reeves' “teaser” last week, in which she hinted strongly that the basic rate of tax would be increased. Following yet another U-turn in which a hike in income tax was denied, the market's view was that government borrowing would have to increase to make up for the shortfall in national income. This view has now faded, as the OBR predicted that the black hole in the nation’s finances is not as large as was first feared.

Rachel Reeves should get billions of pounds of extra room in her upcoming budget, UK Treasury officials believe, thanks to her plan to cut household bills and bring down inflation.

The Chancellor of the Exchequer’s officials have taken their case to the government’s fiscal watchdog and asked that it take into account measures on energy bills, rail fares and other regulated prices in its budget forecast, according to people familiar with the matter.

The Treasury argues that lower inflation will mean lower interest rates, and therefore lower borrowing costs on the government’s substantial debt pile.

Reeve's hopes amount to a silver bullet to kill off the threat of a recession, given the Bank of England's reluctance to cut interest rates to boost growth.

The pound continues to trade in narrow ranges as traders continue to fear getting their fingers burnt so late in the year. It fell to a low of 1.1336 yesterday and closed at 1.3140 in a quiet day’s trading.

Candidates to replace Jerome Powell when his term as Chairman of the Federal Reserve ends next May have begun sharpening their claws to impress the President with their credentials ahead of his expected decision, to be announced before Thanksgiving Day.

Two of the leading contenders, Kevin Warsh and Kevin Hassett, gave their views in support of further rate cuts yesterday. Warsh told the Wall Street Journal that the Fed’s leadership is constantly defending its mistakes rather than correcting them, making it an obstacle to growth, while Hassett, the director of the National Economic Council, echoed that message during an interview on CNBC.

Hassett said the Fed had made “a lot of policy errors” and needed to “turn the page” by returning to an “independent and data-driven” approach. He praised Warsh’s comments and rejected the idea that he would be a partisan choice for the chair role.

Hassett also suggested that Powell’s next steps could determine the timing of a White House announcement on succession. Asked when the administration might unveil its pick, he said the timeline may depend partly on “when Chairman Powell announces that he’s going to resign.”

Federal Reserve Governor Philip Jefferson spoke yesterday about the economic outlook and monetary policy at an event hosted by the Federal Reserve Bank of Kansas City. He said that the FOMC needs to proceed slowly as monetary policy approaches the neutral rate.

He went on to speculate how much government data will be available for the next US Central Bank meeting, and commented that monetary policy is still somewhat restrictive, possibly the message Chairman Powell is trying to convey.

However, it is clear that the balance of risks has shifted somewhat in recent months.

Anecdotal reports about the job market have been mixed; some firms have slowed hiring or cut back, others are adding employees and investing.” There are several views on the short-term path for interest rates, which will become clearer as the fog created by the shutdown dissipates.

Former Federal Reserve Governor Adriana Kugler, who abruptly resigned this summer, had multiple financial transactions in violation of the Central Bank's ethics rules, government filings showed last weekend, with the matter referred to the Fed’s in-house watchdog for investigation.

Kugler, in late July, had sought a waiver to address her spouse's violations of investment rules, including trades in individual stocks and other transactions around Fed policy meetings, but was denied, a Fed official said.

She did not attend the July 30-31 Federal Open Market Committee meeting to set interest rates and announced her resignation the following day, August 1.

Kugler, who had joined the Fed in 2023, first saw issues emerge last year when she reported that her spouse had made stock purchases, including Apple and Southwest Airlines, that were forbidden under Central Bank rules governing the investing activity of members and their families.

The dollar index will likely remain in a narrow range pending three expected announcements in the next few weeks: Jerome Powell’s replacement, the “official employment data for the past two months and the next FOMC meeting. For that reason, traders will be “keeping their powder dry” in anticipation of increased volatility.

Yesterday, the index rallied to a high of 99.60 and closed at 99.54.

The Eurozone economy will grow less than expected next year, an EU executive predicted yesterday, as risks from international trade and geopolitical tensions weigh on the single currency area.

The European Commission forecast that the 20-country single currency area would grow by 1.2% next year, down from its previous forecast of 1.4%.

European Commissioner for Economy and Productivity, and for Implementation and Simplification, Valdis Dombrovskis, said the EU expected US trade policy moves and responses by “key players like China will dampen global trade.”

“The EU’s open economy remains susceptible to ongoing trade restrictions and uncertainty,” Dombrovskis told reporters in Brussels. However, he noted that US trade deals with partners including the European Union “alleviated some of the uncertainties.”

Struck in July, the deal with US President Donald Trump means EU exports face a baseline US levy of 15%, rather than a threatened 30%, which would have wrought havoc on the European economy.

The EU’s data is based on the implementation of the agreed tariffs.

For the entire 27-country EU, Brussels expects growth of 1.4% next year, slightly lower than the 1.5% predicted in May.

Dombrovskis appeared upbeat despite the difficulties.

“The EU’s economy has beaten expectations in the first nine months of the year. Looking further ahead, we expect growth to continue at a moderate pace despite the challenging external environment,” he said.

The Commission believes that the ramping up of Europe’s competitiveness, paired with higher defence spending “focused on EU production” and new trade deals, could bolster economic activity more than projected.”

However, Europe is still lagging behind the US and China.

The most recent IMF survey predicted that regional growth would be 2.1% next year. Investors will look forward to its end-of-year summary to note any substantial change.

The scale of the challenges facing the region as war continues to rage in Ukraine was laid bare in an “options paper” sent by European Commission Chief Ursula von der Leyen to EU countries, spelling out the choices if they don’t back a plan to tap Russian immobilised assets for a reparation loan for Ukraine. Belgium, where most of the assets are located, blocked the proposal at the last EU leaders’ summit.

The options set out by von der Leyen are stark. Cough up €90 billion in grants for Ukraine for 2026-2027, or take on joint EU debt to issue a loan. The grant proposal would mean a hit of between 0.16% and 0.27% to member states’ GDP. At the same time, any EU loan would need the bloc’s nations to “provide legally binding, unconditional, irrevocable and on-demand guarantees.”

With neither option particularly palatable, the pressure is on for countries to get on board with the frozen assets plan. Von der Leyen met Belgian Prime Minister Bart De Wever last week for talks, while Finnish President Alexander Stubb is also due to meet him today in Brussels. With Ukraine facing a funding crisis early next year, von der Leyen urged countries to endorse a plan at their leaders’ summit next month.

The Euro lost a substantial part of the ground it had made up last week in trading yesterday. It fell to a low of 1.1581 and closed at 1.1588.

Have a great day!