28 January 2026: Bailey warns that shadow banking could threaten the financial system

Sir Keir Starmer has arrived in Beijing on the first visit by a UK prime minister to China since Theresa May's visit almost 10 years ago. He has pledged that he is not visiting the country to “upset” Donald Trump by getting too friendly with a Superpower with an agenda different from that of the U.S. President.

A Government spokesperson told reporters that Starmer wants to bring a hard-headed “grown-up” attitude to the UK’s relationship with China, charting a steady but progressive path.

The three-day visit is the highest-stakes journey abroad for Starmer since he took over at No. 10 Downing Street in July 2024. It risks angering President Donald Trump, who on Saturday threatened Canada with 100% tariffs over its recent efforts to improve trade ties with China.

Rather than framing China as a partner or an adversary, analysts say Britain, like Canada, the European Union and some other Western nations, is treating Beijing as a strategic reality that must be managed. Britain, like the EU, has to find alternatives.

Labour has performed another U-turn after Rachel Reeves unveiled a relief package for pubs facing huge rises in business rates. The Chancellor acted following an angry backlash to measures she announced in last year’s Budget. The Government has decided to give pubs in England a 15% discount on business rates starting from April, followed by a two-year real-terms freeze. The discount simply reverses the 15% hike, which was part of a staged increase in business rates over three years.

Although the freeze has been generally welcomed by pub landlords, the wider hospitality sector, including hotels, restaurants and cafes, is crying out for the relief to be extended to include the entire sector.

A letter from 50 Labour MPs, organised by Labour Knowsley MP Anneliese Midgley, a member of the culture select committee, has been sent to Reeves, warning that the change is not enough.

The letter, also signed by former minister Justin Madders and leading Labour MPs Stella Creasy, Dan Carden, Sharon Hodgson, Alex Sobel, Kerry McCarthy, and others, warns that music venues remain under threat.

They said: “The UK Music industry is one of our most important cultural and economic assets, delivering world-renowned artists, venues, festivals, studios and generating significant international soft power. In 2024, it contributed £8bn to the economy.

“Many of us have been contacted by constituents in recent months who use and run these critical music spaces, explaining that they will be severely impacted by the 2026 business rates revaluation, scheduled to take effect on 1 April 2026.

“According to the Music Venue Trust, 84 grassroots music venues in England face rateable value increases of between 45 percent and 275 percent from 2025-26 to 2026-27. These increases do not represent marginal adjustments but existential threats.”

The Bank of England has warned of the “urgent need” to make the shadow banking industry safer amid mounting concerns it could be the cause of the next financial crisis.

Andrew Bailey, the Bank’s Governor, said regulators should not “rest on our laurels” because they had strengthened the resilience of traditional lenders following the 2008 banking crash.

“The challenge now lies in managing risks that sit beyond the banking perimeter as well as identifying and understanding new interconnections between banks and non-banks,” he wrote in an article for The Banker magazine. “There remains a particular and urgent need to increase resilience in market-based finance globally.”

The pound found the “air” at the levels it had reached in previous sessions, a “little thin”, and retraced some of its gains yesterday. It had reached a high of 1.3869, but drifted back late in the day to close at 1.3836.

The FOMC will likely continue the theme of the final quarter of 2025 today when Jerome Powell announces the result of its vote to change monetary policy or leave interest rates unchanged following a cycle of three interest rate cuts over its last three meetings, with analysts calling the meeting “pivotal”.

It is unlikely that the result will see President Trump continue his newfound “conciliatory” tone, which has seen him pull back both internationally, from the threat of using military action to take over Greenland, and domestically, by reaching an agreement with the Democrat Governor of Minnesota to withdraw some ICE agents.

The Fed's interest rate policy is in a wait-and-see mode for the moment. Meanwhile, the questions hanging over the institution are considerably more consequential.

Will Powell continue his assertive pushback against a dubious criminal investigation by the Trump administration? Can the president fire a Fed Governor without firmly establishing cause, as the Supreme Court is now weighing? Who will be Powell's successor when his term as chair expires in four months, and will that person act independently from the White House?

Another open question is whether Powell will vacate his Governor position, which he could hold until 2028, while his term as chair ends in May of this year.

His modern predecessors have stepped down entirely at the end of their terms as Chairmen. Still, Powell has so far declined to comment on his plans, implicitly threatening to prevent the President from stacking the Fed if Trump doesn't stick to appointees who respect the institution's vaunted independence.

Overhanging all this intrigue is the simple question: Is monetary policy sufficiently “neutral” to allow the economy to grow without stoking inflation?

Trump wants rates cut by up to 150 basis points, a move critics believe will mask the risks he is taking to achieve his MAGA goals.

As the race for the next Federal Reserve Chair heats up, BlackRock's Rick Rieder has suddenly emerged as the new frontrunner on prediction markets to lead the Central Bank.

It is believed that the “two Kevins” have failed to spark the level of excitement in Trump that he desires from the appointment and that he has decided that a market-driven Chairman will suit him better than a bureaucrat.

As the market toyed with the idea of a rate cut, the dollar index continued to lose ground. It fell to a low of 95.56 and closed at 95.75.

Germany's economy minister, Katherina Reiche, stated that the country needs to seek new partners due to changing global relations and worsening ties with the United States, which are leading to painful import tariffs.

She indicated that while traditional alliances are important, it is also essential to explore partnerships with regions such as Southern Africa, South America, India, the Middle East, Canada, Australia, and parts of Asia, including Malaysia.

She highlighted the uncertainty regarding the United States’ future role in global economics, especially after tariffs were imposed against key allies. Reiche noted that establishing new economic alliances is crucial for Germany’s economy, which will rely on debt-funded investments in defence and infrastructure, projecting a GDP growth of only 1% to 1.5%.

The German Government is expected to lower its 2026 growth forecast to 1.0%.

Meanwhile, ECB Governing Council Member Martin Kocher told Bloomberg Television that the ECB needs to keep all options available due to the unstable geopolitical and trade backdrop.

The Head of the Austrian Central Bank said he would be cautious about acting before risks actually materialised, especially if inflation risk were not clearly skewed in one direction.

"I would be cautious. Some risks can be addressed in advance, but many cannot, because otherwise one commits to a course of action too early and communication becomes difficult."

He added risks had "shifted slightly to the positive" in the past six months, with slightly stronger growth expectations for the eurozone and stable financial markets.

"Now we have new developments again, but I would not reinterpret the initial situation within a week," Kocher said.

French Finance Minister Roland Lescure told his G7 counterparts on Tuesday that ties between the Group of Seven nations must be grounded in trust and joint solutions rather than unilateral measures, following recent threats by the Trump administration.

France's G7 Presidency this year will focus on securing supplies of rare earths, supporting Ukraine, and addressing global macroeconomic imbalances, the Finance Ministry said after Lescure chaired the first G7 finance chiefs' meeting.

Relations between Washington and other G7 members have been strained by U.S. President Donald Trump's threats to raise tariffs on European goods and his revived interest in gaining control of Greenland.

"Lescure stressed the importance of prioritising dialogue and seeking common solutions rather than unilateral measures," the ministry said in a statement after the videoconference.

He also underlined the need to maintain relations based on trust and respect for common principles of sovereignty and territorial integrity.

The Euro “tested the water above the 1.20 “high water mark” yesterday, but ran into some strong selling pressure in the U.S. session. It eventually closed at 1.2029, having reached 1.2082 as stop losses on speculative short positions were triggered.

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