1 May 2026: The Bank of England faces the ‘most difficult combination.’- Bailey

The Monetary Policy Committee voted 8-1 in favour of leaving interest rates unchanged. Several analysts had predicted a 7-2 vote, with external member Megan Greene, and the Bank’s Chief Economist, Huw Pill, “dissenting”. However, only Pill eventually voted to raise rates to 4%.

In his press conference following the vote, the Bank’s Governor, Andrew Bailey, told the BBC that Pill’s views are “perfectly understandable” and not vastly different from those of others on the committee.

Bailey also pushed back against the notion that it was a dovish meeting, noting that any reaction is, of course, relative to what one had previously expected. A point reflected in surveys: the forecast for a June hold has been revised, and a quarter-point tightening is now considered likely. Deputy Governor Clare Lombardelli added that the three possible scenarios the BOE laid out for how global inflationary pressures might end up are “not exhaustive”.

All they can do is set out some orderly, rational thoughts and update them as the world hurls more curveballs. It seems to be the only reasonable position to hold at a time of such intense volatility. It might partly explain why the MPC looks fairly united and conciliatory, despite wide differences of opinion between those on the hawkish and dovish wings.

Bailey may be considering that the Bank may become a little more proactive. Its “normal” stance is to be data-dependent, but at his press conference, he said, “It would be a mistake to wait to see the second-round effects before acting, because it would be too late.”

Fresh figures from HM Revenue & Customs reveal the scale of the squeeze on earners, with 324,000 more people now in the highest income tax band.

The data shows a staggering 56.8 per cent increase in the number of additional-rate taxpayers between the 2022/23 and 2023/24 tax years.

By the end of that period, some 893,000 individuals were paying the top rate, and their combined tax bill reached £103 billion. This surge reflects a rise of nearly £20 billion in tax liabilities for top earners, up 23.9 per cent on the previous year.

The dramatic increase stems from what experts call fiscal drag, a process in which frozen tax thresholds fail to keep pace with rising wages, pushing workers into higher tax bands without any official rate changes.

Income tax in England, Wales and Northern Ireland operates across three bands: the 20 per cent basic rate, the 40 per cent higher rate, and the 45 per cent additional rate for earnings above £125,141.

The pound climbed to its highest level since mid-February, reaching 1.3612 as traders considered a June rate increase as a “done deal”. It fell back only marginally, closing at 1.3604.

When Kevin Warsh takes over as Federal Reserve chair, he will face vocal internal opposition to any attempt to cut rates prematurely. His predecessor will still be roaming the halls, like some malevolent hawkish spirit.

Taken together, the outcome of Wednesday’s FOMC meeting and Jerome Powell's last as Chair mean that Warsh will face serious constraints if he wants to rapidly steer the Fed in ways its current leadership deems unwise.

He will have to achieve his goals of rewiring how the Fed operates and potentially cutting rates through persuasion, not an order from the chair's office. That has always been true, but the outbreak of dissent to Wednesday's policy statement, combined with Jerome Powell's move to block President Trump from immediately filling his governor's slot, now makes it particularly vivid.

On monetary policy, three Presidents of Regional Reserve Banks dissented from language in the Fed's policy statement implying the next move would be an interest rate cut. Beth Hammack (Cleveland), Neel Kashkari (Minneapolis) and Lorie Logan (Dallas) evidently preferred more symmetrical language that would preserve the possibility that the next move will be a rate hike.

Combined with Governor Stephen Miran's dovish dissent (favouring a rate cut), the four dissents were the most since October 1992.

The U.S. economy grew at a 2% pace in the first three months of the year, as higher investment and a rebound in government spending buoyed business activity, while consumers showed signs of fatigue amid rising prices.

Growth accelerated from the previous quarter, which was hurt by the longest government shutdown in history, according to the Commerce Department report on gross domestic product, the sum of goods and services produced in the United States. But it fell short of Wall Street analysts’ expectations of 2.2% growth and is running below the Congressional Budget Office’s estimate of the economy’s potential to grow without aggravating inflation.

The news on inflation was more worrying, according to a separate government report. Prices in March were 3.5% higher than one year ago, according to the Federal Reserve’s preferred price gauge, the personal consumption expenditures index. Excluding volatile food and energy costs, the index rose by 3.2%, up from 3% in February.

An idea about the rise in inflation may well have spurred the three FOMC dissenters. It also showed the idiocy of Stephen Miran's vote to cut rates, as he mindlessly carried out the President’s orders.

“The underlying trend in GDP growth remains solid,” according to several economists. Worryingly, the data showed clear signs of inflationary pressure.

The war in Iran, which began on Feb. 28, contributed to that pressure. The prolonged interruption of oil and gas shipments through the Strait of Hormuz drove up the price of gasoline, diesel fuel, natural gas and jet fuel. Regular gasoline now averages $4.30 per gallon, a four-year high, according to AAA.

Consumers dialled back their spending on goods while continuing to spend on in-person services, such as sporting events or restaurant meals. However, a surge in business spending on new equipment, up more than 17% from the preceding quarter, and on software drove the overall economy, where AI continues to have a significant influence.

The dollar index lost ground, falling to a low of 98.02, even as oil prices reached their highest level in four years. With both the Bank of England and the European Central Bank making significantly more hawkish statements following their Monetary Policy meetings, the dollar lost some of its appeal.

A sharp war of words has erupted between Chancellor Friedrich Merz and President Donald Trump, triggered by Merz’s increasingly blunt criticism of Washington’s handling of the Iran conflict. Merz has argued that the U.S. lacks a clear strategy and is being “humiliated” by Tehran’s negotiating tactics.

Trump responded with escalating attacks on social media, accusing Merz of everything from undermining U.S. efforts to supposedly supporting Iranian nuclear ambitions, a claim Merz has explicitly denied.

The dispute intensified when Trump told Merz to “fix your broken country”, criticising Germany’s immigration, energy policy, and its role in the Ukraine conflict. He also warned that the U.S. is reviewing a possible reduction of American troops in Germany.

Despite the heated rhetoric, Merz has tried to downplay the personal rift, insisting that his relationship with Trump remains “good” and that dialogue continues. He has emphasised the importance of the transatlantic partnership and NATO cooperation, even as he stands by his criticism of U.S. strategy.

Berlin has also signalled that it is prepared to deal with fewer U.S. troops, though it continues to stress alliance unity.

Domestically, Germany delivered some encouraging economic news yesterday. The economy grew by 0.3% quarter-on-quarter in the first three months of the year, defying the adverse impact of the war in the Middle East, for now at least. Despite rather disappointing monthly data in January and February, the economy grew by 0.3% quarter-on-quarter, up from 0.2% QoQ in the final quarter of 2025.

As the government enters its second year in office, the data should not obscure the need for a reset, aimed at preventing the economy from slipping back into stagnation and, more importantly, reform paralysis.

However, in France, the news was not so encouraging. Although economists had forecast French growth of 0.2% to 0.3% for the first quarter, economic activity stalled at 0% in the first three months of the year, according to the initial estimate published yesterday by France's national statistics bureau, INSEE. The flatline followed a 0.2% increase in the last quarter of 2025.

The sluggish start to the year already undermines the Government's annual growth forecast of 0.9%. "That figure, which was still realistic a few weeks ago, now seems highly optimistic," Insee commented.

Overall, the eurozone economy expanded by 0.1% q/q in the first quarter of 2026, according to Eurostat’s flash estimate. This is down from 0.2% q/q in Q4 2025 and reflects a broad loss of momentum across the bloc.

Year-on-year, GDP rose 0.8%, also slower than the 1.3% recorded in the previous quarter.

The Q1 deceleration is clearly linked to the energy shock triggered by the U.S.–Israel war against Iran, which disrupted oil and LNG flows through the Strait of Hormuz. This pushed up energy prices, squeezed household purchasing power, and raised input costs for industry.

If the blockade of the Strait continues, the ECB will face a tough decision. Yesterday, it was clear that it is considering a rate hike in June, should inflation continue to rise and begin to seep into the wider economy, while activity continues to suffer, raising the spectre of stagflation.

The European Central Bank left its main interest rates unchanged following yesterday’s Governing Council meeting, despite the jump in inflation driven by surging energy prices.

Headline inflation rose to 3% in April, up from 1.9% in February before the war started, with energy prices doing most of the work. Energy inflation alone jumped 10.9% this month.

But the Council still opted against raising borrowing costs, as the same shock may also drag down economic growth.

“The conflict is already weighing on economic activity,” ECB president Christine Lagarde told the press.

“We debated at length and in depth various options, including the possibility of hiking,” said Lagarde. “The reason we are not hiking today is that we do not see second-round effects.”

Second-round effects usually refer to rising wage demands, and Lagarde told the press that she sees no “intention on the part of corporate leaders to increase wages significantly.”

The Euro reacted strongly to the ECB’s meeting, rallying to a high of 1.1741 and closing at 1.1731. Despite President Trump's rhetoric and the change in Fed Chairman, the ECB is still seen as more hawkish on monetary policy than the Fed.

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