1 June 2026: UK banks still lack access to Mythos’ AI model, Bailey says

British businesses remain downbeat about the economic outlook for the months ahead, according to a survey from the Confederation of British Industry. However, a separate Institute of Directors survey found smaller firms were less negative.

"Activity continues to be buffeted by weak household spending and clients' reluctance to commit to big expenditure," CBI Deputy Chief Economist Alpesh Paleja said. "Ongoing tensions in the Middle East are adding another layer of pressure, with firms increasingly alert to the risk of further cost increases."

Recent data releases paint a clear picture of the mood among businesses of all sizes. Although SMEs and large corporate entities use different methods to combat the downturn, they are all uniformly affected.

Output expectations for CBI members for the next three months edged up to -24 in May from -25 in April, but were well below February's 15-month high of -13, before the Iran war. The balance for the three months to May fell to -31 from -24 in April, which was at least above March's 4-month low of -35.

The IoD's economic confidence index rose to -53 in May from -64 in April, touching its lowest level since the series began in 2016. The CBI data is based on 659 responses to its surveys of manufacturers, retailers, wholesalers, and consumer and business services firms between April 27 and May 13, and the IoD data is based on 615 responses between May 15 and May 27, almost half of which employed fewer than 10 people.

British banks still have not been able to access Anthropic's Mythos artificial intelligence model to test their systems against cyber threats, six weeks after the Bank of England first raised concerns, Bank of England Governor Andrew Bailey said on Friday.

Bailey, speaking to Bloomberg TV, said Anthropic was willing to share the models on a trial basis, but there appeared to be a political hold-up.

"It hasn't happened yet. I think this has been somewhat caught up in the process with the U.S. administration," he said in an interview on the sidelines of a central banking conference in Reykjavik.

"Quite why the process is a bit different from one company to another, I'm afraid I can't explain to you. Obviously, from our point of view, given our concern about the risks involved in this, it's very important that there is unfettered access," he said.

Anthropic has sparred with the U.S. administration over guardrails for how the military could use its AI tools.

Last month, Bailey said, "Anthropic may have found a way to crack the whole cyber risk world open".

Since then, some cybersecurity experts have told Reuters that fears of unfettered hacking with the model are overstated.

President Donald Trump last week postponed signing a broader executive order on AI that was expected to create a voluntary framework for AI developers to engage with the Government before the public delivery of advanced AI models.

Bailey, who also heads the international standard-setting Financial Stability Board, said there needs to be a global approach to hacking risks, particularly in the financial system. "Spillovers from this sort of cyber risk are so big that we can't just have a single sort of national approach," he said.

"Anybody who thought, 'Well, I've dealt with my banks, that's okay, I'm afraid that won't work, because they're all so heavily interconnected.

Wes Streeting told the Sunday Times this weekend that there should be a reversal of the “punitive” level of employers’ national insurance contributions.

The Labour Party MP, former Health Secretary, and likely candidate in any Labour leadership contest, told Rachel Reeves to cut National Insurance for businesses. Streeting told the Sunday Times there should be a “targeted reduction” of employers’ national insurance contributions.

It could serve as a way to “actively incentivise” hiring, the former Health Secretary added. Department for Work and Pensions boss Pat McFadden responded to the calls from Mr Streeting on Sky News.

Speaking yesterday, McFadden said: “It’s a fair point of debate to say maybe we should expand that or do something with it, but like every other call for a tax change, there’s a cost to these things. You have to net these things off.”

As we start a new month, it is unlikely that Sterling's drivers will change until there is a resolution to the crisis caused by the conflict in Iran. Traders feel that a rate hike this month is a done deal, which may provide the currency with some support, but it's unlikely to break above its medium-term support around 1.3620. Last week, the pound traded between 1.3409 and 1.13367, closing moderately lower overall at 1.3450.

Several members of the FOMC made speeches last week outlining their views on the U.S. economy, most likely to give Fed Chairman Kevin Warsh notice of their likely voting intentions at the upcoming rate-setting meeting before the Blackout on comments begins.

The blackout allows markets to give due consideration to any likely change to monetary policy without any undue influence from the more verbose members of the Committee.

Daly, Schmid, Bowman and Paulson all made speeches at various gatherings last week.

The San Francisco Fed President was the “first cab off the rank”. She said that while she is committed to the Fed’s 2% inflation goal, she doesn’t see mass unemployment or displacement from AI. That was a rather oblique “vote for a hike.

Next came Kansas City’s Jeffrey Schmid. He warned that inflation is too hot and the “energy shock may not be temporary.” He is clearly concerned about any “transitory” talk which caught Jerome Powell off guard following the COVID pandemic.

Fed Governor Michelle Bowman said it is too early to make a full policy pivot due to the “Iran situation.” She may well vote to leave rates unchanged at the meeting. In contrast, the Philadelphia Fed’s Anna Paulson said, “Inflation pressures are weighing on the economy”.

A hike is by no means certain at the FOMC meeting, which will take place on 16/17 June, since there are as many views on the economy as there are FOMC members. With both Rarsh and Powell due to attend the meeting, it will be interesting to see the role President Trump’s views will play and how much Powell will want to continue to defy him.

Warsh has said several times since he was confirmed as Chairman that he will “be his own man”, but the acid test of that sentiment is fast approaching.

Warsh would prefer the central bank to be a passive observer rather than actively influence markets through its bond and MBS purchases. But to "get out of the fiscal business," the Fed would have to sell most of its balance sheet assets -- and this comes with potentially serious consequences for Wall Street.

Since bond prices and yields are inversely related, selling trillions worth of long-term Treasury bonds would almost certainly depress prices, raise yields, and increase borrowing costs. In other words, even if the FOMC hypothetically didn't change its easing bias statement and left the federal funds target rate unchanged, reforming the central bank's balance sheet would amount to one or more rate hikes by making borrowing costlier.

National Economic Council Director and Trump “disciple” Kevin Hassett painted a rosy picture of the economy yesterday, downplaying Americans' growing pessimism amid high energy prices and rising inflation as the war in Iran continues.

"Look at what's happening to real wages," Hassett told ABC News' "This Week", claiming "really positive news" about the economy was being ignored. "On balance, real incomes, real wages are going up."

The latest report from the Bureau of Labour Statistics showed that wages did not keep pace with inflation in April; wages were up 3.6% for the year, while inflation was up 3.8%.

In Gallup's latest survey, Americans' economic confidence dropped to the lowest point since October 2022. Additionally, the University of Michigan released its twice-monthly consumer sentiment survey the same day; consumer sentiment fell for the third straight month, reaching its lowest level ever and dropping 10% since April.

When pressed on the anxiety Americans express about the war's impact on the economy, specifically rising energy prices, Hassett argued that Americans will view their economic situation positively when making political decisions.

"But are you saying Americans are not hurting?" he was asked. "Just talking to people, I mean, people seem anxious and uneasy about the economy, don't they?"

Hassett replied, "Well, look, in the end, people look at their wallets, and they decide how to vote, and if they look at their wallets and look at how much money they have after the increase in prices, they're going to find that they have a lot more money."

Hassett acknowledged that high energy prices are causing a pinch, but said he was hopeful they would subside soon.

The dollar index had a quiet week as the back-and-forth between Washington and Tehran continued. It traded between 99.54 and 98.75, closing at 98.92, down just 0.42%.

Prices are rising quickly across the EU’s biggest economies, according to early May figures. The numbers reinforce growing expectations that the European Central Bank will raise interest rates at its meeting later this month.

France's inflation rate rose to its highest level in more than a year.

The country's EU-harmonised inflation rate (HICP), a measure used to compare inflation across the eurozone, came in at 2.8% year-on-year in May, driven by higher energy prices, particularly natural gas, according to preliminary data from the national statistics agency, INSEE.

Monthly, prices edged up just 0.1% from April, reflecting some easing in energy costs, even as they remain well above their levels a year earlier.

The reading is nonetheless the highest HICP since February 2024 and continues a sharp acceleration from the 1.1% rate recorded as recently as February.

Inflation in Italy also rose sharply in May, according to preliminary figures published by the National Institute of Statistics (ISTAT). The HICP rate rose to 3.3%, slightly higher than the expected 3.2%, and up from 2.8% in April.

Notably, goods inflation picked up to 3.5% from 3.1%, and services inflation rose to 2.8% from 2.4%. At the same time, core inflation, which excludes volatile energy and food prices, edged up to 1.8% from 1.6%, suggesting that higher energy costs are beginning to feed through into broader price categories.

By contrast, Germany offered a marginal reprieve.

The flash estimate put the HICP rate at 2.6% in May, down from 2.9% in April and meaningfully below the 2.8% consensus forecast, making it the only one of the 'Big Four' where headline inflation slowed this month.

However, core inflation told a different story, rising to 2.5% from 2.3% in April.

For the ECB, the easing headline figure in Europe's largest economy offers limited reassurance, as the underlying trend continues to move in the wrong direction.

The data being published this week comes at a pivotal moment for the European Central Bank, which holds its next monetary policy meeting a week from Thursday.

A rate hike is widely expected, and the minutes from the April meeting, published on Thursday, showed that the ECB Governing Council is well aware of the stakes.

In its biannual Financial Stability Report, the ECB stated that "a scenario of notably weaker growth associated with a more persistent energy shock could trigger a reassessment of fiscal sustainability and an abrupt repricing in sovereign bond markets."

Rate markets are now fully pricing in one 25-basis-point hike at the June meeting, with two hikes expected by September and December.

The April minutes also revealed a notably hawkish internal debate. Several members indicated that the April decision to hold rates was a close call and that they "would not have opposed raising rates at the current meeting had this been on the table."

On Friday, Bank of Italy Governor and ECB Governing Council member Fabio Panetta reiterated a hawkish tone, saying that the persistence of the war in Iran and the risk of further supply disruptions pointed to the need for intervention.

ECB Chief Economist Philip Lane, who has just entered the final year of his term, told a conference in Tokyo that the energy shock caused by the Middle East conflict will likely have a persistent impact on inflation, even if the war is quickly resolved.

While oil prices have historically tended to revert to their original levels after a surge, the current episode may be different, as energy costs may remain elevated as countries restock inventories or diversify their energy mix, he said.

"We had an overnight, fairly quick and big decline in global oil supply, which has been masked until now by inventories," Lane said at the conference hosted by the BOJ and its think tank in Tokyo.

"Even if the initial energy shock starts to reverse, the second-round effects will be with us for a while," he said.

Lane continued, “There could be some policy lessons from past energy shocks, such as that rising energy costs could push up inflation abruptly and cause 'all sorts of non-linear' mechanisms that broaden price hikes.”

"But it's not the same non-linearity we had four years ago," when supply disruptions from the Ukraine war and strong demand from the COVID re-opening pushed up inflation, he said.

The Euro mirrored the dollar last week, rising marginally to a high of 1.1685 and closing at 1.1658.

Have a great day!