18 June 2026: No change is the only option for the MPC

Inflation unexpectedly held steady, a reading sure to be a relief for Bank of England rate-setters ahead of today’s interest rate decision. Consumer prices rose 2.8% in May, unchanged from April and below expectations, according to the Office for National Statistics.

Food costs were the biggest drag, though almost every sector helped to hold inflation down, offsetting upward pressure from transport, air fares, petrol and vehicle taxes.

Price pressures remain, but markets reacted positively after a string of data pointing in a dovish direction. Traders have trimmed their bets on a series of rate hikes, pricing in just one by the end of the year.

“This can give the Bank of England more confidence that it doesn’t need to raise interest rates immediately, or possibly at all,” said Paul Dales, chief UK economist at Capital Economics. He added that inflation should return to the BOE’s 2% target next year.

The much-anticipated Makerfield by-election takes place today, with the Mayor of Manchester, Andy Burnham, favoured to win a seat back in Westminster, allowing him to take part in a much-anticipated election to become leader of the Labour Party.

The Prime Minister, Sir Keir Starmer, whose job is coveted by Burnham, has been making all the right noises about fighting an election and has even welcomed Burnham’s likely return to national politics. In an interview yesterday, he told the BBC that while he hopes for and expects a Burnham victory, this will trigger another vote, this time to elect Burnham’s replacement as Mayor of Greater Manchester, which Labour will need to win to restore stability.

The data is clear: Andy Burnham’s path to No. 10 Downing Street runs through the most difficult political terrain he could have chosen.

Voters across the United Kingdom have fled Labour since the 2024 general election, instead embracing the populist right Reform UK Party and its anti-immigrant message. That’s turned many strongholds into politically dangerous waters for Labour, and Burnham has picked the constituency that’s the hardest of the lot for him to win.

He has bet his political future on forcing a special parliamentary election to give himself a path back to Westminster, where he hopes to challenge Prime Minister Keir Starmer for the chance to lead the country. But out of all the seats in his region, Burnham has chosen to run in Makerfield, which has a largely white, Christian, working-class electorate and is the hardest for Labour to hold on to, according to several election models.

“Team Burnham” reported yesterday that if their man is successful today, he will reject any offer to join Starmer’s Cabinet,

The pound tumbled yesterday. The main catalyst was UK inflation coming in softer than expected, which lowered expectations of near-term Bank of England tightening. UK CPI came in below the 3% forecast, while core inflation also undershot expectations. Markets thus priced in a more cautious BoE stance, weighing on sterling.

At the same time, global risk sentiment favoured the dollar, amplifying the downside for GBP/USD.

It fell to a low of 1.3262 and closed at 1.3292.

Federal Reserve Chair Kevin Warsh unveiled sweeping plans to review key practices at the Central Bank yesterday, signalling an end to forward guidance and marking what he described as a “new chapter” for U.S. monetary policy. This has meant doing away with the “bias” which had been towards easing since the beginning of the year.

Despite the significant policy shift, investors focused primarily on the FOMC' s more hawkish interest rate outlook.

The FOMC voted unanimously to keep the federal funds rate unchanged at 3.50%- 3.75%, in line with market expectations. However, the updated Summary of Economic Projections, commonly known as the dot plot, projected the benchmark rate at 3.8% by the end of 2026, up from 3.4% in March.

The revised forecast suggests one additional 25-basis-point rate hike.

Warsh also introduced five new Federal Reserve task forces focused on communications, balance sheet policy, data usage, productivity and employment trends, and inflation frameworks. While the Fed's 2% inflation target will remain unchanged, the reviews could lead to major changes in how the Central Bank communicates policy decisions and evaluates economic conditions.

The Fed's latest policy statement was significantly shorter than previous versions and emphasised economic growth, labour market stability, and elevated inflation. Warsh said the streamlined approach is intended to provide markets with facts rather than policy guidance.

Financial markets reacted negatively to the more aggressive rate outlook. The S&P 500 fell 1.2%, marking its worst performance on the first policy decision day under a new Fed chair. Treasury yields surged as investors sold government bonds, with the 2-year Treasury yield jumping nearly 17 basis points to 4.212% and the 10-year yield rising to 4.492%. The U. S. dollar also strengthened.

On one point, Warsh was emphatic: The committee was united and determined to bring inflation down. “We've missed for five years, and we're going to fix that,” he said, pledging that the committee would “unambiguously and unanimously” deliver price stability.

He declined to say whether that meant raising rates. “The good news is we'll be meeting in six weeks.”

U.S. retail sales increased more than expected in May, with households boosting motor vehicle purchases even as they paid more for gasoline. Still, a slowdown is likely as the cushion from larger tax refunds against higher prices diminishes.

The fourth straight month of strong retail sales reported by the Commerce Department on Wednesday added to a pickup in job growth, highlighting the economy's resilience despite the oil price shock from the U.S.-led war with Iran.

That data, together with rising inflation, has increased the chances of a Federal Reserve interest rate hike by year-end. However, economists argue that the bar for policy tightening is high, given that oil prices have eased.

"The strength of May's retail sales report and the acceleration from April's spending pace will raise more yellow flags at the Fed as it tries to tamp down consumer inflation pressures," said Scott Anderson, chief U.S. economist at BMO Capital Markets.

The dollar index attempted to break through its year-long high of 100.60 but was repelled by strong sell orders. It fell back to close at 100.39 after reaching 100.57.

In a recent speech in Venice, Lagarde emphasised the need for robust regulations to mitigate the risks associated with AI, which she believes could trigger a financial crisis if not properly managed. She noted that historical financial crises have led to significant job losses and the erosion of savings, often more than the effects of technological advances.

The ECB has been proactive in addressing these concerns, conducting cyberattack scenario tests with more than 100 Eurozone banks to identify and rectify vulnerabilities.

"We cannot stop artificial intelligence, even with robust regulation," she said. "What we can do, however, is prepare ourselves so that our citizens can benefit from it and be protected from its dangers, and that’s what we’re doing."

Lagarde emphasised that the main concern is not AI itself, but the potential turmoil it could cause in financial markets.

"As these systems become more powerful, they are increasingly penetrating deeper into our economy."

According to Eurostat data, annual inflation in the Eurozone rose to 3.2% in May, up from 3.0% in April. A year earlier, in May 2025, the rate stood at 1.9%.

Across the broader European Union, annual inflation increased to 3.3% from 3.2% the previous month. In May 2025, the corresponding figure was 2.2%.

In Greece, for example, inflation reached 4.9% in May, according to Eurostat’s final data, slightly below the preliminary flash estimate published on June 2, which had put the rate at 5%.

The lowest inflation rates in the EU were recorded in Sweden at 1.1%, followed by Denmark and the Czech Republic, both at 1.8%.

At the other end of the spectrum, Romania posted the highest inflation rate in the bloc at 9.7%, followed by Bulgaria at 6.3% and Lithuania at 5.1%.

This continues to highlight the inefficiencies of the ECB’s “one-size-fits-all” monetary policy.

Compared with April 2026, inflation declined in 11 EU member states while rising in 16.

Services made the largest contribution to overall inflation, adding a little over 1.6%, followed by energy at 1%. Food, alcohol and tobacco contributed 0.6%, while non-energy industrial goods added 0.25%.

Energy prices continue to exert a significant influence on the inflation outlook, despite efforts to stabilise markets following recent geopolitical developments in the Middle East.

German investor optimism improved more than expected, on hopes that a swift end to the Iran war will ease pressure on Europe’s largest economy.

The ZEW expectations index rose to 10.5 in June from -10.2 in May. That’s well above the -5.5 median estimate of analysts in a Bloomberg survey.

A measure of current conditions worsened to -81.

“Financial markets expect the Iran conflict to be nearing an end,” ZEW President Achim Wambach said on Tuesday in a statement. “This is likely to ease the massive pressure on energy prices and inflation, which would benefit energy-intensive industries and private households and would strengthen domestic demand.”

The Euro lost ground against a strengthening dollar yesterday, falling to a low of 1.1478 and closing at 1.1501.

Have a great day!